(Ramsey) You’ve heard the scary predictions: America is headed for a recession! The market is falling! Gas prices are skyrocketing! Inflation is out of control!
Take a breath.
We currently aren’t in a recession, and no one knows for sure when America will have its next recession. (We’ll leave predictions to the talking heads on cable news.)
But if you’re wondering what to do with your money in a recession, we’ve got answers. Hint: It’s not stuffing it under your mattress.
Here’s the deal: Recession or not, there’s no time like the present to take control of your money. If living through a pandemic wasn’t enough to light a fire under you, then maybe the possibility of a recession will help send the message home—you need a plan for your money.
What Is a Recession?
Before we get too far here, let’s go back to economics class together and walk through what a recession actually is (a little boring, but stick with us). A recession happens when there’s a slump in economic growth (measured by gross domestic product) for at least two quarters. GDP is the total of all goods and services produced by the economy.
GDP was -1.5% in the first quarter of 2022, but this could be an outlier because consumer spending and unemployment numbers still appear strong.1 And we won’t know second-quarter GDP numbers until the end of July.
Hey, we know it’s tough out there. Inflation is up. The stock market is down. But don’t focus on things you can’t control—like the economy or whether sweater-vests are going to be cool again (fingers crossed). Focus on what you can control: your finances.
At the end of the day, you’re in control of what happens in your house, and that’s some good news right there! When you’ve got your money in a good place, you don’t have to live at the mercy of what the economy is doing.
What Happens During a Recession?
Recessions cause companies to lose money and sometimes go bankrupt. That usually leads to job losses and a downhill slide in the stock market. Yep, no fun.
But recessions come in different intensities. Have you ever ordered hot wings and got to pick what heat level you wanted? Level 1 was mild, and Level 5 was something related to the devil.
Well, our last recession—caused by coronavirus shutdowns—was mild. Sure, GDP dropped big-time and unemployment skyrocketed, but the economy recovered quickly.
And then there was the infamous Level 5 Great Recession of 2007–09. Want to know our super scientific term for it? Devil fire. Yeah, it was bad and burned much longer (18 months) than typical recessions.2 Lots of businesses failed (or had to be bailed out by the government), and unemployment hit 10%.3
The Great Recession was the worst recession since the Great Depression (the OG of harsh economic times).
The big takeaway here is that recessions are a natural part of the economy that happen every five to 10 years. We hope the next one will be mild, but even if we have a moderate or a devil fire one, there are smart ways to handle your money and prepare for a recession.
Should You Pay Off Debt During a Recession?
Absolutely. The only time you should take a break from paying off your debt is when you’ve got some serious stuff going on, like you just lost your job or there’s a baby on the way. That’s what we call “storm mode”—where you’re heading into some uncharted waters and need to hang on to as much cash as you can. As long as your job is stable, a recession isn’t a storm you need to stop Baby Step 2 for.
Instead, use the possibility of a recession as even more motivation for why you need to cut debt out of your life forever. Think about the peace of mind you’d feel if you didn’t have debt in the middle of a recession.
How awesome would it be to get to a place where you could invest and make some huge returns when the economy swings back? That’s the thing about debt—it robs from your future and keeps you stuck in a rut, paying for the past. So don’t waste any more time. Shake a leg and get that junk out of your life forever.