Last year's record-high inflation and ramped-up interest rates left many fretting that a recession was around the corner. But after the January jobs report — indicating an increase of 517,000 positions (much higher than the 187,000 predicted) — those recession fears have dwindled quite a bit. With cooling annual inflation and the unemployment rate at its lowest level in over half a century, Treasury Secretary Janet Yellen is predicting a low probability that a recession will hit this year.
But when you couple Yellen's comments with reports of consumer spending stalling — a main driver of the economy's growth — you end up with a mixed forecast that has many economists (not to mention regular Americans) scratching their heads. What's not uncertain is that if a recession does come to pass, you're better off mentally preparing for it now.
"When a recession strikes, it can bring along with it an overall downturn in your household balance sheet — losses in retirement and investment accounts, decreases in home value, reduced wages or bonuses and possibly even a layoff," CFP Bryan Kuderna, author of "Millennial Millionaire" and "What Should I Do with My Money?" tells CNBC Select.
If your first instinct is to cut any expense you can, think again. In fact, there are four things Kuderna argues you shouldn't cut back on if a recession hits.
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Don't cut back on these 4 things during a recession
While Kuderna notes that it's natural to tighten up your spending, he advises not cutting back on the following items unless you're completely out of options:
1. Insurance
Kuderna, like many financial advisors, preaches a protection-first strategy; it only takes one gap in coverage to upend everything you have.
"It's tempting for people to want to erase a cost that does not seem to add any value each month or year," Kuderna says. "But there's a saying in insurance that, 'If you can't afford the premium, you'll never be able to afford the problem.'"
Instead of sacrificing your coverage entirely, you can ask your insurance providers for packaging discounts or better rates if a recession hits. Kuderna specifically calls out disability and life insurance as two critical products that can protect your economic value to your family or business. "Not only does lapsing these coverages bring about great risk, but to restore them at a later age can be costlier or perhaps impossible based on changes in health," he explains.
CNBC Select ranked Northwestern Mutual 'best overall' on its list of the best life insurance companies, based on customer satisfaction and financial strength.
Northwestern Mutual Life Insurance
Cost
The best way to estimate your costs is to request a quote
App available
Yes
Policy highlights
As the largest life insurer by market share in the U.S., Northwestern Mutual is an established choice with a proven record. And, it offers a number of types of policies across the country.
2. High-interest debt payoff
Paying off your high-interest debt (i.e. credit card debt) is always good advice, but that's especially true during a recession — even right before it. The Federal Reserve is expected to continue rate hikes this year, which could translate to hundreds of dollars being added to an unpaid credit card balance in just a handful of months.
"This can be a drag on your financial plan, which is why it's so important to have these affairs in order before a recession strikes," Kuderna says.
If you don't think you can completely pay off your credit card debt ASAP, consider buying some time by transferring that debt to a balance transfer card with a zero-interest introductory period. This will shield your budget from today's high interest payments and give you breathing room to pay down your debt. The credit cards below each offer an introductory 0% APR period for 21 months:
Wells Fargo Reflect® Card
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.
Regular APR
18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers
Balance transfer fee
5%, min: $5
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees. Terms apply.
Citi® Diamond Preferred® Card
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% for 21 months on balance transfers; 0% for 12 months on purchases
Regular APR
18.24% - 28.99% variable
Balance transfer fee
5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees.Terms apply.
Citi Simplicity® Card
Rewards
None
Welcome bonus
None
Annual fee
$0
Intro APR
0% Intro APR for 21 months on balance transfers from date of first transfer and 0% Intro APR for 12 months on purchases from date of account opening.
Regular APR
19.24% - 29.99% variable
Balance transfer fee
There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Foreign transaction fee
3%
Credit needed
Excellent/Good
See rates and fees. Terms apply. Read our Citi Simplicity® Card review.
3. Savings
"Liquidity is key in good times and bad," Kuderna says. If you can keep contributing to your savings in a recession, he suggests you should — even if that means temporarily pausing your investment and retirement contributions until the economy improves.
"People who stop paying themselves first risk watching their cash positions dwindle, which can introduce credit card debt when expenses arise, in turn leaving them playing catch up when the economy rebounds," Kuderna explains.
Now is actually a good time to open a savings account while rates are high. You can earn more on the money you set aside while having the reassurance that it's accessible when you need it. To compare the best options for you, check out the Savings Marketplace tool that CNBC Select recently launched.
CNBC Select also compared the best high-yield savings accounts that allow you to grow your cash-savings even faster. Some accounts, like UFB Secure Savings, are offering APYs north of 4%, which is quite high in recent years.
UFB Secure Savings
Annual Percentage Yield (APY)
Up to 5.25% APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to 0.20% APY on savings
Minimum balance
$0, no minimum deposit or balance needed for savings
Fees
No monthly maintenance or service fees
Overdraft fee
Overdraft fees may be charged, according to the terms; overdraft protection available
ATM access
Free ATM card with unlimited withdrawals
Maximum transactions
6 per month; terms apply
Terms apply.
Read our UFB Secure Savings review.
4. Education
Kuderna advises eliminating other discretionary expenses before cutting back on your education. "Learning is the key to exponentially increasing future wealth, both in the monetary sense and in the 'state of well-being' definition I prefer," Kuderna says. In practical terms, an advanced degree or additional skills can help you advance your career (or at least keep your job) if a recession leads to layoffs and a more competitive job market.
Bottom line
If a recession hits in either the coming months or the second half of this year, Kuderna's advice is to not cut back on your insurance coverage, your high-interest debt payoff, your savings or your education. You might find it difficult to prioritize these expenses, but keeping up with them will pay off in the long term when the economy stabilizes again.
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