If you're paying any attention to the news, you've probably seen the word “recession" show up. I think we all know that a recession isn't good, and it might make us feel fearful, but what exactly is it and what should you do about it?

What determines if we are in a recession?

A recession is technically defined as two or more quarters in a row of negative economic growth as measured by GDP. Don't worry if that sounds like a bunch of financial blather. The point is that the economy isn't growing. 

Are we living in a recession? 

We met the official definition of a recession over the summer. HOWEVER, economists are debating whether we are actually in a recession because employment numbers are still good. So I guess the answer is: we're kind of, maybe in a recession and if we're not we might still sort of get there? 

Things are bad. How are we NOT in a recession?

Fair point.

Whether or not we are officially in a recession doesn't really matter. Recessions are normal economic cycles. What is much more relevant is how you're doing. 

Many people are struggling right now. Inflation is high. It's harder to get a mortgage you can afford. Interest rates on debt are increasing and making debt more expensive and harder to pay. 

If you're feeling the pain, does it really matter if we're officially in a recession or not? You know when things aren’t great. 

What should I be doing with my finances right now? 

Managing your money during tough times should be mostly the same as managing your money during good times. You should always have a strategy of saving for the future, getting rid of (or avoiding) credit card debt, and protecting yourself from risks. 

If you’re not doing those things, now is a great time to get started. In particular, here are a few things to focus on:

1. Build up your savings (aka emergency fund or “oh crap” fund)

Having extra money saved is critical for helping you pay the bills if you lose income or for keeping you out of debt when something bad happens. 

2. Work extra hard to pay off high interest debt

Typically, this means credit card debt, although student loan interest rates are creeping up too. With interest rates on the rise, your debt is costing you more and more money. Get rid of it as fast as you can (but don’t sacrifice your emergency savings). 

3. Tighten your belt

One common financial rubric is to keep your fixed, necessary expenses to somewhere around 50-60% of your income. This includes housing, utilities, transportation, food, and basic home supplies. In essence, everything you would absolutely not be able to give up if you lost your income. 

Some people may be spending more than that, particularly if they live in a high cost of living area or are in the daycare stage of life, and that’s okay. But if you’re struggling to get by and/or your necessary living expenses are a much higher percentage of your income, you need to start figuring out how to reduce those expenses. 

Not doing so puts you at risk of not being able to get ahead, not having enough saved for emergencies and retirement, and going into debt if something were to happen.  

If your living expenses aren’t too high, you have an emergency fund, you’re saving enough money, and you don’t have expensive debt (with interest rates above 7% or so), reducing your expenses isn’t as critical. 

4. Do some “spring cleaning”

Even if you don’t need to reduce expenses, it’s always a good idea to regularly assess your spending and get rid of things that you’re not using or shop around for better rates on things like cell phones, internet, insurance, etc. 

5. Make a plan for what you’d do if you lost income

Recessions increase the risk of job loss, so it’s never bad to prepare. Take a look at your expenses and identify things that you could cut if you had to. Figure out how much it would take to pay your essential bills and keep enough in savings to float you for awhile. Think about what you’d do if you needed to find a new job (see #6).

6. Consider updating your resume, make connections or reconnect with people in your industry, and practice interviewing. You could also think about what kinds of jobs you’d be interested in and work on boosting your skills and knowledge in those areas. 

7. Diversify your income sources

Having more sources of income can lessen the effects of losing your job. Consider taking on a side-hustle, especially if you have debt or no savings. Figure out what you could do if you had to get a temporary job while you searched for a new one. If you are self-employed, think about how you can add income streams. 

Stay At Home Parents:

 I was a SAHM for many years while my children were little and I don’t regret it. However, staying at home as a primary caregiver does increase the risks for your family when the income-earning spouse loses their job. While I would never tell anyone not to stay at home if that makes sense for your family, I do recommend that you be extra intentional in figuring out how to protect yourself in the case of lost income. Maybe that means extra savings, or maybe it means keeping your skills and licenses up to date just in case you have to get a job. Just be aware of that extra risk and make a plan to protect your family. 

A few silver linings

Things may seem bad right now, but there is some good news:

1. You can earn more on your savings

For years, interest rates have been in the toilet, which means your accessible, regular savings has been earning next to nothing. But that’s changing! There are more ways than ever to earn a little extra on the money you save. Check out some of these options for where to save your cash. 

2. The housing market will be less insane and houses may become more affordable

Rising mortgage rates can make buying a house more expensive, but the flip side is that it gives buyers a little more control and flexibility. Hopefully, the days of massive over-bidding, cash-only offers, bidding wars, and waiving of inspections are coming to an end. 

Stick to what you can control

Nobody knows exactly what will happen, and the truth is that larger economic trends are out of our control. This can feel scary, but it’s important not to let fear rule your decisions. Stay on track (or get started) with solid financial strategies. Find someone to help you make a plan and stick to it if necessary. 

Ultimately, the most important thing is to focus on what you can control and do what you can to protect yourself and your finances in case something happens.