Even when the economy is booming, individuals can feel uncertain about their finances. During recessions, those uncertainties can escalate into fears about losing one’s job, losing one’s home, losing one’s savings or investments.
In early 2020, unprecedented measures to halt the Covid-19 pandemic slowed business activity worldwide. The National Bureau of Economic Research (NBER) announced in June that the longest period of economic expansion in U.S. history had ended and that the country was officially in a recession.
The sudden onset of a deep recession has affected many Americans. Massive government stimulus packages haven’t been enough to prevent the tide of job losses or financial struggles. Given this backdrop, it’s normal for individuals to begin worrying about paying for basic necessities or seeing their incomes or investments dwindle.
Here are some common fears that people typically deal with during a recession and what they can do to manage and review their personal finances during stressful economic times.
6 Common Recession Fears
There are a few major concerns an individual might have about being in the midst of a recession whose duration and intensity is still unknown.
1. Fear of Losing a Job
The core equation in personal finance is income versus expenses, and in many cases, the primary source of income is a job. To a very large extent, especially during a downturn or slowdown that affects the whole economy, whether or not an individual keeps their job or not may not be in their control. During a recession, companies may be forced to layoff some of their workforce.
So do what you can to hold on to your job. Be open and flexible to changes in responsibility. Try finding ways to bring value to the company, by going above and beyond, or by learning a new skill. Make connections with your coworkers and network with people in your industry. It might be helpful to brush up your resume too. That way, should you be laid off, you can hit the ground running with your new job search.
2. Fear of Depleting Savings
Another common recession fear is dipping into savings or even taking on debt if the savings on hand aren’t enough. Emergency savings are important in any circumstances, as it’s not just a loss of income that can throw the balance off of the money coming in and the money going out.
There are also unexpected expenses that you should be saving up for. A recession is a good time to tend to those savings, keeping them as robust as possible and avoid drawing them down as little as possible. A common rule of thumb is to maintain savings of three to six months worth of income if possible. Even if you can’t get there now, it’s a good idea to see how close you are.
3. Fear of Paying For Expenses
While it’s hard, in the short term, to increase your income, you likely have more control over your expenses. Some substantial expenses are hard to cut down—housing, whether a mortgage payment or rent are the most persistent—but some can.
The first step to getting your expenses down is to know them. Take a look at your current spending habits. Some find a budgeting app like SoFi Relay helpful. Once you have an idea of your spending, break it down into categories—food, entertainment, clothes, etc—and see where you can trim your spending. This extra money could be used to bolster your savings.
While the COVID-19 pandemic is largely what pushed the economy into a recession, it could also present some savings opportunities: for example, while restaurants are beginning to open, some people are opting to stay home. Those working from home may find that they are spending less money on new clothing or cosmetics, or even less money on things like gas. Other questions worth asking as you find a way to cut your expenses could be:
• Can you negotiate your cell phone plan? Do you need an unlimited data plan if you’re not leaving your home?
• Can you cut your cable bill?
• Do you need all your other streaming channels? Any recurring expenses that get cut can bolster sour savings over time as they add up each month.
4. Fear of Additional Expenses and Income
One of the biggest expenses you have to pay are your taxes. Depending on how you earn money during the year, your tax payment for the previous year can be one of your largest single expenses—but it can also be an opportunity for one of your biggest single checks: your tax refund.
5. Fear of Loan Payments
While refinancing your mortgage or student loans is a major decision, during a recession, interest rates tend to drop, meaning that in many cases, refinancing could result in a lower interest rate for qualified borrowers, which could help you reduce the amount of money you spend over the life of the loan.
However, refinancing a federal student loan would eliminate it from federal protections, like income-driven repayment plans, deferment, or forbearance.
6. Fear For Your Investments
If you’re nervous about your ability to earn income at the level you do currently, you’re probably also nervous about your investments. Recessions are often very bad for stocks and you might have one of two worries, or both: should I still be contributing to my retirement plan and should I access it in a pinch?
Everyone’s situation is different and it can help to consult with a financial professional who can offer personalized advice before making any big decisions. Here are a few things worth considering before you make an adjustment to a retirement account. should think about. Making an early withdrawal from a tax advantaged retirement plan can result in substantial tax penalties , however, the CARES Act includes some exceptions to early withdrawal penalties from 401(k)s and IRAs.
While this could temporarily help some families and individuals facing financial hardships, tapping into retirement savings is a big decision. Think carefully about the implications now and for your future.
Others may consider suspending their contributions to a retirement plan. This could allow people to free up some income that could be used to meet necessary living expenses. But recessions are associated with lower stock prices, which means your contribution could buy more shares that they normally would.
Navigating personal finances can be tricky even in the best of times. It’s normal for a recession–particularly one as sharp as the one triggered by the Covid-10 pandemic–to add stresses to an individual’s finances and wellbeing.
Individuals can better manage potential burdens by understanding which fears are common during a recession and proactively preparing to mitigate the effects of such hardships.
Getting advice from a qualified financial professional can provide insight that can help you create a financial plan best suited to your unique financial circumstances.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.