The onset of the 2022 recession has affected many Americans, sparking fears about possible job loss, paying for basic necessities, and seeing their investments suffer. These worries are normal, and fortunately there are ways to cope in the short-term.
The first step is overcoming the fear itself. While it’s normal to be worried about a recession — how long it might last, how dire the consequences might be — the truth is that the financial world is cyclical. This recession will end, as others have ended, and a bull market will follow.
💡 Recommended: SoFi’s Recession Help Guide
5 Common Recession Fears
In many ways, the best mantra during a recession might be the saying: “Keep Calm and Carry On.” That’s because when it comes to making financial decisions, emotions are rarely your friend. As a vast and growing body of financial behavioral research suggests, when people make impulsive choices about money, things rarely turn out well.
1. What If This Recession Lasts for Many Years?
While it’s possible that a recession could last for a long time, it helps to have some historical context.
How long do recessions last? Since the end of World War II, there have been 11 recessionary periods — including the short, sharp decline in early 2020 sparked by the pandemic. While that one only lasted a couple of months, U.S. recessions have averaged about 11 months in duration, according to data from the National Bureau of Economic Research (NBER).
There have been outliers: Notably, the Great Recession of 2008 lasted for 18 months; and the Great Depression of the 1930s lasted about four years, although the repercussions extended that financial crisis until 1938.
That said, bull markets tend to last longer than bear markets. Equally important to remember is that every financial crisis has also informed new monetary policy and new fiscal tools that help protect consumers and investors.
2. What If Unemployment Soars?
It’s true that the potential for job loss is higher during a recession, when companies may be forced to lay off some of their workforce. While this is a common occurrence — as demand for goods lessens and output drops, companies typically need to cut expenses — there is a potential upside.
NBER data shows that unemployment numbers lag a bit; joblessness typically rises to its highest level at certain points during the recession, and recovers to prior levels after the recession has ended. This means that some workers may have a window of opportunity to either look for new jobs now, or shore up their savings (in case of a layoff).
Be open and flexible to changes in responsibility. Lower your expectations around raises and bonuses. Try 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 spruce up your resume too. That way, should you be laid off you can hit the ground running.
Take advantage of the shift to the gig economy, e.g. becoming your own boss, and relying on various income streams rather than a single full-time job. Not only are part-time positions becoming more common, it’s possible that your employer may be open to a gig arrangement, rather than completely letting go of a qualified employee.
A common rule of thumb is to keep three to six months’ worth of income in an emergency fund.
3. What If You Lose Your Savings?
Emergency savings are important in any circumstances, as life is full of curveballs and unpredictable expenses. To that end, it’s smart to keep at least one month’s worth of expenses in a rainy day fund — three to six months is better, of course, but always have a cushion for life’s inevitable emergencies.
A recession, especially one where inflation is playing a big role as it is in 2022, can hit your savings hard. But it’s better to spend down your emergency fund than to panic and make financial moves you’ll later regret. At all costs, try to avoid the following:
• Covering expenses with your credit card, and incurring debt that you have to pay off at high interest rates.
• Taking out a home equity loan. While the interest rates may be lower on these loans, it’s still an additional monthly expense. And if your home value dips, you could put yourself in a precarious position when you need to sell.
• Taking a loan from your 401(k). While borrowing from a 401(k) has its pros and cons, and a loan is usually better than taking an early withdrawal, there are still a number of risks. The biggest being: If you do get laid off, the entire loan could be due within a 12-month period.
In short: Build up your savings while you can, especially if you’re concerned about losing your job. And don’t be afraid to spend some or even all of that emergency money if things go south. That’s what the money is there for.
4. What If You Can’t Cover All Your Bills?
A recession can mean that money is tight, and that your bills may go up. If a job loss is looming, you may have real fears of being able to cover your expenses. Fortunately, one area where you have some control is how much money you spend.
The first step in lowering your expenses is to get to know them, especially the bills and subscriptions you pay automatically (or are on an auto-renewal system).
Take a look at your current spending habits by examining your bank statements (you can usually get a transaction history right on your phone). You don’t have to read through months of expenditures. What you spend in one month is probably similar to what you spend any other month (despite some seasonal differences).
As you examine what, where, and why you spend, note that some expenses are easier to control than others. Here are some common areas where it’s often possible to make cutbacks:
• Food (eating out, snacks) and groceries are generally the biggest household expenses, after mortgage or rent — but they’re also easy to rein in.
• Utilities (e.g. use less gas, oil, electricity).
• Clothing and other “nice-to-haves” (limit spending to necessities).
• Subscriptions (you’re likely paying for several streaming or music services you rarely use; it’s easy to forget what you signed up for a year ago).
• Examine your insurances. Sometimes you can lower premiums by switching providers or calling and asking for a discount.
Once you trim your expenses, you may realize there are other ways you can cut back that aren’t on the above list — but not everyone has these options. You could change your commute to save money. You could take on a roommate who can split expenses.
5. What If Your Investments Lose Value?
It’s likely that your retirement account(s) and investment portfolio could lose value when the markets are down, or fluctuating. As discussed above, you don’t want to react strongly and pull your money out of the market impulsively. That’s when you lock in losses that can be hard to recover from.
If you have a financial advisor, or you’re thinking of working with one, you may want to discuss sooner rather than later how well-diversified your portfolio is. Diversification can help protect against volatility in some cases. But portfolio diversification is ideally something you do before a recession sets in.
A better approach during a recession is to stay the course. Continue to invest; continue to save for retirement. Rather than impulsively change your financial behavior, intentionally keep doing what you’ve always done. One way to do this is by using a robo advisor, which incorporates highly sophisticated technology that uses automation to help you stick to your own plan. You’ll likely find yourself in better shape when the recession ebbs and the markets rise once more.
It’s natural to feel worried about the onset of a recession. Most people have fears about how long a recession could last and what the possible consequences could be in terms of their jobs, their bills, their long-term savings and even retirement.
That said, there are a number of ways to cope. While headlines may sound dire, the reality of a recession is that it may not last as long as you fear. Also, it can take some time for ordinary people to feel the impact. That can give you time to be proactive, including giving your job options (and spending habits) a careful review, beefing up your emergency savings, and reminding yourself to stay calm above all.
Making impulsive decisions — like cashing out your 401(k) or using your credit card to cover bills — may not be necessary, and will almost certainly leave you in worse shape.
Even though it feels counterintuitive, during a recession your best move is often to stay the course, which is easy when you open a robo advisor account with SoFi Invest. You can set investment goals, and SoFi’s highly regarded automated platform helps you establish a diversified portfolio with automatic rebalancing. There are no SoFi management fees, and you can get started with as little as $1.
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.