FB_LOGO

Preparing For A Recession On A Tight Budget

Apple Podcast Spotify Google Podcast

Join the Money Matters Email List

Receive email alerts any time a new podcast episode is released!
Name

Today we’re going to answer the question, “What can I do to prepare for a recession if my budget is already tight?” Before we answer that question I wanted to give you an update on a news story of interest and a couple of takeaways.

Elon Musk is the new owner of Twitter, and he’s not wasting any time making changes. After firing the chief executive of the company and three other top executives, other layoffs now appear to be in the works for the 7,500 employee company. Twitter is a household name, so you might think they are making lots of money. According to the Wall Street Journal the company has only posted a profitable year 2 years out of the last 10. Musk appears to want to change that by starting with reducing costs. In some ways, it’s an instructive turnaround story in the making to learn from. It is not uncommon for companies to be able to create revenue. The greater challenge is to manage that revenue profitably. For our Small Business listeners, remember that it is not the top line number that is most important, but rather the bottom line. It is true that you must have revenue to have a positive bottom line, but for many small businesses they grow revenue while often ignoring the bottom line. If you do this long enough, you will not be able to stay in business. For our other listeners, your salary is important, but how you utilize it is even more so. Concentrate on being faithful with the income coming into your household through generous giving, strategic spending, and consistent savings.

Now let’s talk about our march toward recession. In order to frame this rightly we have to talk about interest rates.

The Fed is on pace to raise their Federal Funds rate another .75% when they meet this week. That would move the Prime Rate up to 7%. The Prime Rate is a proxy for other loans, particularly business loans. But Prime isn’t the only thing that has gone up. A 30-year conventional mortgage is averaging above 7% currently. Could rates go even higher? Absolutely. One of the things the market will be watching from the Fed meeting will be whether they signal an intention to reduce the amount of future increases from .75% to .50%. They have indicated this far a determination to beat inflation – which means the Prime Rate could easily go to 8% and even higher if inflation is stubborn and refuses to respond. Raising interest rates are a blunt tool, so there are often unintended consequences, including the risk of a moderate to severe recession. Because inflation has been stubborn thus far – I am inclined to think a moderate recession, rather than a mild one is a higher probability. Talk to any realtor in town, and they will tell you there has been a softening in certain parts of the market, and a downright slowing in others. Buyers are asking for concessions, and some sellers are reducing their prices – even on the lower end of pricing. If a recession is coming (and I think it is in 2023) and if your budget is already tight in this environment, what can you be doing now to prepare?

Reduce or eliminate your car debt. One of the things that American’s are notorious for splurging on is our vehicles. Particularly in this part of the country, we love our trucks. There is nothing wrong with trucks. But if you are looking for ways to reduce your expenses, selling a brand new big truck for which you have a $600 monthly payment would be a good start. Right now, values still remain high, so you may be able to sell the vehicle without being underwater. You might could find a slightly used and less “souped up” truck that could cut your payment in half. Or you might even be able to find a sedan for a fraction of the cost. Vehicles are legitimate needs in our part of the country, but an expensive one if you can’t afford it. There is nothing inherently wrong with an expensive vehicle – but if you are complaining about a tight budget and are unwilling to reduce the investment you have in your vehicle, you may have truckitis or expensive vehicle syndrome. Cutting back now, while values are still high could place you in a better position to weather a recession.

Eat out Less. It is almost always more expensive to eat out than to cook at home. If your are finding it difficult to make ends meet, cutting that out could make a big difference. For many households, food is your highest discretionary expense. Planning a week of meals ahead and eating those leftovers could easily shave a couple hundred dollars from your spending each month.

Scale Down your Vacations. Vacations are awesome, and I believe they are absolutely necessary to maintain a strong work/homelife balance. But they don’t have to be expensive. Staying closer to home, utilizing state parks, and even having activity filled staycations can be ways to reduce your annual spending, sometimes by thousands of dollars. If you want to increase savings going into a recession, toning down your vacations can accomplish that.

Look for additional work. If you prefer to increase your income instead of reducing your spending, you could look for a part-time job. There are many companies allowing people to work remotely in the evenings or on the weekend. This could also help boost savings and increase your buffer going into a recession. But be sure to weigh the cost in time. More earnings is not good if you are sacrificing more important things in the process (like quality family time). Weigh the pros and cons before signing on to more work.

If your budget isn’t tight, build cash and be ready for opportunities. How well you do in good times is often determined by the opportunities you seize in bad times – so be in position to seize them.

At MBC and Foundation Bank we can help you evaluate these opportunities. We don’t just offer money, we offer advice. If you’re looking for a financial partner on your next project, visit our website at foundationbank.org to start your financial conversation. If you’ve found this podcast helpful, we hope you’ll subscribe on your favorite podcast app and share with your friends on Social media. Please remember that this does not constitute a recommendation You’ll need to consult your own advisor for advice specific to your unique situation.

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on November 1, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.