There are many factors impacting the economy, but the most recognizable one is the Federal Reserve’s decision to raise its key interest rate by half of a percentage point. While that increase may seem insignificant, the change will have a cascading effect on other rates as it passes through the economy.
Partner Mark Welsh said the bottom line is, “debt is going to get harder and harder to obtain. That’s kind of what [the Federal Reserve is] trying to do; they want to cool off the economy.” In effect, “people are going to think twice before they borrow on their credit card, or borrow on their home equity loan, borrow on a second home, or borrow on a business loan,” Welsh said.
As preparation for a potential recession, Welsh recommends taking a few steps. “[People] need to try to figure out how they can lock in fixed rates, or pay down debt, or pay off debt. That’s got to be the number one thing,” he said. “Credit card [interest rates] are going to get higher. They’re already high, and are going to get higher. So, […] if you can, pay off those credit cards, or at least try to get the balances down.”
The next step is for consumers to assess where expenses can be cut, according to Welsh. “People are going to have to budget, and start thinking about what they’re able to cut back on,” he said. “People could start thinking about maybe staying home more, not spending money.”
This includes taking the perennial financial advice of bolstering your savings cushion. “When things are going good you feel like you can spend money. But, when we’re in a recession, you should have a little cushion. Most experts say you should have at least a six month cushion,” he said. “Unfortunately, most Americans are not in that position, to be able to have six months.”
First time homeowners should exchange their variable rate for a fixed mortgage rate. “Go into your bank and say ‘I want to lock it in.’ Of course, it’s probably going to be higher to lock in for 15 or 30 years. But, you want to lock in your downside risk,” he said.
And should the recession hit harder than anticipated, there are options to lessen the blow by taking a second job or selling off valuables. “You may be able to get some extra money. That may seem somewhat drastic. But, believe me, pawn shops thrive in recessions,” said Welsh.
Read the full article published by WMDT.