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Financial experts have been sounding recession warnings since the latter part of 2022. So if you’re worried about an economic downturn, you’re in good company.
New data from Northwestern Mutual reveals that 67% of Americans think the U.S. economy will enter a recession later this year. And among those who are expecting a 2023 recession, 19% anticipate it lasting more than two years. It’s not surprising, then, that 36% of Americans are cutting back on daily spending to cope with recession fears by doing things like eating out less frequently or postponing concert ticket purchases.
If you’re concerned about an impending recession, you may be inclined to cut your spending, too. But is that really necessary? Here’s how to know.
It’s a matter of savings
The less money you spend, the more you should be able to save. And as a general rule, the more cash in a savings account you have, the more financial protection you get.
But that doesn’t necessarily mean that your savings are in poor shape. In fact, if you have enough money in the bank to cover a full three months of essential expenses, then you’re actually in pretty good shape. And if you have savings beyond that point — say, enough money to cover five or six months of bills — then you may not have to cut any spending at all.
But if you don’t have enough money in savings to pay for three months of bills, then making changes to your spending habits is probably a good idea. Even during the best of economic times, it might take you three months to find a job after losing one. And so it’s important to have money in the bank to cover yourself financially while you look for one.
During a recession, when companies aren’t rushing to hire, it might prove even more difficult to find a job. So that’s why it’s really essential to be able to cover three months of bills from your savings.
Finding expenses to cut
Identifying expenses to reduce may not be easy. And some of your bills may be expenses you’re locked into. If you signed a mortgage leaving you with $1,200 monthly payments, it’s not exactly as if you can decide to start paying $1,000 a month instead.
Rather, you’ll need to look at things like groceries, entertainment, and subscriptions to see where there might be wiggle room to cut costs. If you’re willing to shop more frugally, you might manage to slash your grocery bills quite a bit. And if you’re willing to unload some subscriptions you don’t use all that often, that, too, will free up cash.
If identifying expenses to cut really isn’t feasible, you could instead look to get a second job. But the point is to make sure there’s a way to pump money into your savings so you’re protected in case economic conditions worsen.
All told, you may need to get on board with cutting your spending if your savings won’t allow you to cover three months of bills. And even if you are at that point, if there are expenses you can give up pretty easily, you may want to go that route and buy yourself more protection in savings form.
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