Empower Blog

January 17, 2023

A 2023 Market Outlook & Steps You Can Take to Prepare

Financial Planning
As we start a new year, now is a great time to take stock of what’s happened financially in the past year and think about what changes can be made in the year ahead. Many experts are forecasting the possibility of a recession in 2023, though many believe that it is likely to be mild. In our recent podcast, we discussed what a recession is and the steps you can take now to prepare and plan for the year ahead. We’ll also dive into them here.  

First, let’s describe what a recession is.

 

You’ve probably seen a lot of talk about a recession in the news lately. The most recent recession happened during the COVID-19 pandemic, and it was one of the shortest and steepest recessions in history. It was only two months long, so you might have barely noticed it – or completely missed it - given everything else that was going on. Other than that recession, if you are under 30, you really haven’t experienced one in your adult life because we just recently exited the longest economic boom in our history, from 2009 to 2020.

 

So, what is a recession?

 

A recession has historically and technically been defined as two consecutive quarters of declining GDP or negative economic growth. It is broadly viewed as a prolonged, wide-spread, and deep-decline in business activity. Simply said, businesses and individuals are intentionally cutting back, becoming more conservative in anticipation of a further decline in business activity and consumer spending.

 

So, what happens in a recession?

 

Typically, when a recession is on the horizon companies tend to slow hiring, slow production, and begin to trim expenses where they can. This can affect consumers in many ways. It may mean fewer hours for your job, fewer jobs available for those entering the workforce or looking for a job, and that some people may even lose their jobs as companies cut back or even close down.

 

With that in mind, what can we do to prepare for and weather a recession?

  1. Start a Plan and don’t panic – Easier said than done, but try not to focus on things you can’t control and focus on what you can control instead, like your finances. Use this moment as extra motivation to trim your expenses, reduce or get out of debt and saving more money. Having a plan is the first step in gaining a sense of control over your finances, regardless of what the economy is doing. Ask yourself these key questions as you begin to plan ahead.
    • How much cash do I have on hand?
    • How much debit do I currently have (credit cards, student loans, etc.)?
    • What are my basic monthly living expenses, including food, shelter, insurance, transportation, and childcare?
    • Where can I trim simple expenses (Do I really need 6 different streaming services all at once? What about that daily coffee or eating out often?)?
    • Are there any major life events coming up with significant expenses attached (for example, medical procedure, a baby, or retirement)?
  2. Budget This will allow you to see where you can cut back so you can still cover essentials like gas and groceries. Budgeting also can prevent you from going into debt or spending more than you make. To create a budget, list out your monthly income, expenses, and debt. Knowing where money is coming from and where it’s going can help you start to take the reins back. Try using CommunityAmerica’s Money Management tool, the Mint app, or a classic Excel spreadsheet.

    Bonus Budgeting Tip – The 50/30/20 Method
    One of the most common percentage-based budgets is the 50/30/20 rule. Using this system, you will allocate 50% of your budget to needs such as housing, insurance, and transportation. Then, 30% of your income goes toward wants, which can be eating out, shopping, travel, and more. Finally, 20% of your income goes toward savings and debt. While this budgeting system is popular, it’s likely not ideal for people with significant debt to pay off.
  3. Prioritize your spending – Your budget can help you understand the impact your spending choices today will have on your ability to meet your longer-term goals like paying off debt, saving more money, or retiring early. Now might be time to try the 50 needs/30 wants/20 savings Rule to help you prioritize finances.
  4. Investing - Your investments may tend to suffer in the early days of a recession and then rebound nicely in anticipation of an economic recovery after the recession, so be patient and wise about investing in a recession. Take this opportunity to test your risk tolerance and deepen a relationship with your financial advisor. Now is a great time to lean on the professionals in your life — it’s always helpful to have a sounding board as well as someone who can give you great advice or a second opinion. History tends to repeat itself so remember, this will not last forever and we’ve been economic downturns before so don’t make any quick decisions that you might regret as it relates to investing. Let us do the worrying for you. Contact a Wealth Advisor for some peace of mind.
  5. Smart Borrowing – Stay within your means and only buy things that you can afford so don’t borrow your ‘later’ to pay for your ‘now’. In other words, don’t use credit cards or payday loans to fund entertainment, vacations, or clothing unless you plan to pay the balance off each month. This is deemed as ‘bad’ debt whereas buying a house or having student loans would be considered ‘good’ debt. Recessions are often a time of lower interest rates, so consider refinancing any debt that you have. Home, car, and asset prices are often a little lower in a recession, so if you are considering purchasing a home or car, it may be a good time if you are confident in your employment.
  6. Emergency Fund – Experts say to pay yourself first and save at least 3 to 6 months of living expenses in an account that’s safe and secure. This helps ensure that temporary job loss or an unexpected expense won’t result in debt or cause you to cash other investments.
  7. Upskill or Side Hustles – Now is the time to learn a new skill, take a class or obtain a certification to stay more marketable. Some workers also worry about layoffs, so it may be beneficial to pick up a side hustle such as freelancing, selling items, or Uber driving. Having an extra stream of income can not only help in the event of a potential layoff but can make it easier to build your emergency savings while you're still employed. In the unfortunate event that you are laid off, never fear, many people say that the next job following a layoff was better than their last and they are actually better off having been through that experience.

 

Although there are a few uncertainties for our economy in the year ahead, there is no need to panic. Remember, recessions are a normal part of the economic business cycle – and you will make it through to the other side. Like so much in life, having a plan, being prepared, and maintaining a positive outlook can help you persevere through anything life throws your way. If you feel as though you need to make changes to your accounts and policies ahead of a possible recession, please contact a professional Wealth or Insurance Advisor for further advice. Our Well-Being Coaches are also available to answer any questions you might have regarding budgeting, saving, or financial wellness in general.

 

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About the Author
Amy Grothaus
Amy Grothaus

Community Development

Amy Grothaus is the Senior Vice President of Community Development at CommunityAmerica Credit Union. In her role, Amy oversees our Community Access Center and the Financial Well-Being Initiative of the credit union. With over 20 years of experience in the financial services industry, Amy remains a motivated, passionate, and results-driven leader who has consistently succeeded in directing member/customer experience, operations, and people initiatives for the organizations she serves.

Amy has proven results in launching new initiatives, driving sales, and technology implementation. She is a trusted visionary in our community with the ability to energize teams, partner cross-functionally, and influence at all levels.

In her free time, Amy is an avid food enthusiast who enjoys staying healthy and all things wellness. Amy graduated from UMKC and lives in the northland with her husband and three children.

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