Soaring inflation, painfully high gas prices, a pandemic, and war in Europe have created financial instability for individuals across the country. While some economists are at odds with each other over if and when a recession officially hits, Johns Hopkins Carey Business School Professor Jordan Rippy says planning now will prevent panicking later.
"Inflation is going to be with us for a while," Rippy says. "We are finding out that inflation is stickier than we first imagined. It's not going to be a cease and abate immediately.
"Buckling in for the long haul is an appropriate stance," she adds. "How long is it going to last? We don't know."
The worst thing you could do, Rippy says, is to pull money out of your savings account.
Image caption: Jordan Rippy
"The most common mistake made in a chaotic, sort of recessionary time, is to say, 'Oh my gosh, I can't lose all my money, so I'm going to pull it out,'" she says. As long as you've parked your money with a government-insured bank, you will be fine. The Federal Deposit Insurance Corporation, or FDIC, insures all bank deposits up to $250,000. But it's important to know that the FDIC doesn't cover contents of a safe-deposit box or investments products such as stocks, bonds, mutual funds, annuities, and life insurance policies.
But most Americans also carry debt, and that can be scary in an unstable economy. Rippy advises that there's debt that is actually good and then there's the debt that can severely impact your life.
Having good debt can actually keep you more financially secure, Rippy says. Paying down a mortgage, for example, results in building equity in a home and provides some potential tax advantages. Also, making that monthly mortgage payment has the additional benefit of improving your credit score, Rippy says.
While student loan debt is financially dangerous because of the interest and how long it can take to pay off, it can also have a positive impact on your credit score because your payment history appears on your credit report. Making payments on time makes up about 35% of your credit score, and helps you develop creditworthiness.
When it comes to bad debt, Rippy says credit cards can put people in a bind. She says that, unlike student loan debt, some of those credit card reward programs give cardholders an extra incentive to spend, so make sure you can pay off that monthly bill.
"It's like taking advantage of a sure win when you pay off your credit card debt," Rippy says. "Because money that was costing you 18% is now costing you 0% because you just paid it off."
But keep in mind that unless you pay your balance in full every month, the interest charges may more than offset the value of your rewards.
Top five ways to stay financially secure
Looking across the entire economic landscape for what these kinds of economic situations mean for your finances, Rippy shares five tips for enduring a bumpy economy:
1. Automate your saving
À la James Clear and Atomic Habits, we know that people who automate their savings do a much better job of continuing to save when their motivation or enthusiasm wanes. Automatic withdrawals from your paycheck into your employer sponsored 401(k) or 403(b) plans are key. You have to reduce the friction and eliminate the need to make a decision to save. Decide one time and then set it up. Employer sponsored plans are what we call tax-advantaged plans, so savings into those plans before savings into some kind of brokerage account is a good idea."
2. Don't spend that bonus
If and when you get a bonus or a raise during the year, put some or all of it directly into your savings account. If you do it immediately, you won't miss it.
3. Pay down bad debt
Paying off your consumer debt (namely, credit cards) is like an automatic savings plan. Decide on either the snowball or avalanche approach and then work toward consistently paying off your debts.
4. Take advantage of employer benefits
If you aren't already taking full advantage of your employer's matching retirement contribution, you need to get there as quickly as possible. If you don't take that, you are leaving free money on the table.
5. Don't let costs pile up
Do a clean-up of the subscriptions that you have accumulated but perhaps don't use. Coffee subscription? Digital streaming services? Magazines? It is easy to let those accumulate because you forget about them or just never remember to go back in to cancel them when you aren't using them anymore.
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