Two Cents

- Since 2020, the US has enjoyed a generally positive growth rate of its Gross Domestic Product.

The figure economists use to get a sense of how fast the economy is growing or shrinking, but that streak of good fortune may be about to end.

Recently, the Atlanta Fed predicted a negative growth rate for the first quarter of 2025.

If true, that means that Americans will have earned less, spent less and produced less than they did at the end of 2024.

If that happens twice in a row, the US will have entered a recession.

- The tough thing about giving people financial advice during a recession is that once the recession has begun, it's kind of already too late.

As financial advisors, one of our main jobs is to make sure our clients are ready for the unexpected curve balls life has a way of throwing at you: an expensive illness, a sudden layoff, a natural disaster or a recession.

- Just a quick look at the historical data will tell you that it's gonna happen sooner or later.

Whether that ends up being just a bump in the road or a total financial catastrophe may depend on your level of preparation.

(upbeat music) - No two recessions are exactly alike, but there are always three different ways they can affect your pocketbook.

First, your investments.

Stocks typically tank during a recession as companies earn less revenue and investors retreat to safer assets like treasury bonds.

If you hold financial interest in say, an IRA or a 401(k), that may take a hit, but don't panic.

One of the biggest mistakes people make at such times is selling investments that have already lost value.

Historically, despite occasional dips, a diversified portfolio will recover with time.

The worst thing you can do is to sell it at a guaranteed loss, not to mention aiding potential taxes and penalties.

In fact, if you're making regular cash contributions to your investments and can afford to continue during a recession, you'll probably be getting shares at a cheaper price.

The second big effect is on prices.

Typically, consumer demand falls during recessions, which often results in lower prices.

In fact, a combination of low growth and rising prices known as stagflation was once thought to be impossible until it happened again and again in the latter half of the 20th century.

Economists say a variety of factors can cause stagflation, including tariffs.

- The really scary thing about stagflation is there's little that can be done to combat it.

One of the main tools the government has to influence the economy is raising or lowering interest rates.

Turn the knob one way and unemployment comes down, but inflation goes up, turn it the other way, and inflation comes down, but unemployment goes up.

But what if you have both problems at the same time?

It's a situation that no country wants to be in.

We are not close to a period of stagflation yet, but people are starting to use the word.

- The third, and for many main way a recession can impact your finances is through your employment.

Companies scale back and people lose their jobs.

Those that remain may see their pay cut or their hours reduced.

For people living paycheck to paycheck, this can have devastating consequences, and those just entering the workforce may see long-term negative effects.

One study found that young people were more likely to accept a low starting salary during a recession, which hindered their earning potential for decades.

So if you're graduating college or trade school just as the recession's starting, you may wanna see if mom and dad will let you crash in the basement for one more year.

- The financial pressure that all this creates can put American households in a spot where it's easy to make big mistakes, like for instance, ignoring debt.

It might be tempting when times are tough to put it all on a credit card and deal with it someday down the road.

But this can sink you into a hole that will persist long after the recession ends.

During periods of stagflation, interest rates may be high, meaning that debt comes at a steep price, and neglecting bills can cause damage to your credit score that may haunt you for years.

- The best way to avoid the worst effects of a recession is to live every day like you're already prepared for one.

And at the top of that prep list is an emergency fund.

Having enough readily available cash on hand to float you for three to six months without income means not having to rack up debt or sell off your retirement investments just to make ends meet.

Because debts and investments both accrue interest, every dollar you keep in an emergency fund could save you at least two during a recession.

- Another way to prepare is by having a budget.

After you've been laid off is about the worst time to try to figure out your expenses and priorities.

When times get tough, people with a budget already know how much they need to survive, which debts can be postponed, and which costs can be cut back on.

Instead of being caught in a full-blown panic, which no one makes good decisions in, they can make rational evidence-based adjustments.

- And lastly, do your best to eliminate high interest debt.

If God forbid, you become unable to make monthly payments on a credit card with 20% interest, that can balloon into a monster by the time the recession's over.

Carrying high interest debt is like carrying around a vibration sensitive bomb that can go off with the slightest bump in the road.

- Most people who have these three factors in order will be able to weather an average recession and get back on their feet.

But what if a recession has caught you off guard without a budget or an emergency fund?

The first rule is still don't panic.

There are things you can do to soften the blow.

- First, make some cutbacks.

If you don't have a budget, you might not know where to start, but some of the most obvious discretionary spending is entertainment.

Most people can afford to choose between Netflix and Max, at least temporarily.

I happen to be a Max girl.

- No way, Netflix all the way.

- Then what do we get rid of?

- Peacock.

- Peacock.

- A caveat to that, don't cancel subscriptions that you rely on for work.

The point is to get back on your feet, not hibernate and don't become a hermit.

Humans need recreation and society.

Instead of dinner and a movie, maybe invite your friends over for board games and boxed wine.

- Second, some debts can be postponed in cases of hardship, like student loans, mortgage payments, and even some credit card debt.

It's definitely worth a call if it can potentially save you a couple hundred bucks a month.

If you have high interest loans that can't be deferred, consider paying them down quickly so the balance doesn't get out of control.

- And third, look for help.

There are many government programs like unemployment insurance and rental assistance that you may qualify for.

Your family, friends, and community can also be of help perhaps to split expenses or offer you a place to stay until the economy turns around.

Swallowing one's pride is far preferable to getting stuck in a decades long pit of debt.

- [Julia] And lastly, there are lots of free resources for financial guidance and information online... like this!

- [Philip] When things seem grim, it can be tempting to stop thinking about money altogether, but that's the worst thing you can do.

Being prepared for a possible recession isn't as hard as you'd think.

- And by watching this video, you've already taken the first step.

- And that's our two cents.

- And that's our two cents.