Are We in a Recession? If So, Having Cash Helps
Ongoing stock market volatility and record inflation are fueling predictions of a recession. If the predictions are correct, both businesses and individuals will be looking to protect their liquidity and financial security. And one way to accomplish that is by having cash on hand.
In the context of a recession, â€œcashâ€ typically refers to physical currency as well as liquidity in the form of savings and money-market accounts at your bank. These types of accounts help you avoid the stock market`s inevitable ebb and flow, and ride out an economic downturn.
So, are we in a recession? As of this writing, it is unclear if a recession is under way. An official recession requires two consecutive quarters of declining gross domestic product (GDP). In the first quarter of 2022, the economy shrank 1.6%. Other recession indicators typically include a bear market on Wall Street and rising unemployment.
But while the stock market has been shaky in recent months, unemployment has remained low. In fact, the U.S. economy had been enjoying a period of fast growth that included a 7% boost in the fourth quarter of 2021.
Even though economic experts have differed on whether a recession is coming, and whether it will be a global contraction, the public seems to believe one is on the way. A recent CNBC poll found that 83% of employed adults are worried about a recession. If you`re among them, now is a good time to review your cash position, investments and spending habits to determine how prepared you are to weather an economic storm.
It isn`t always possible to make purchases with cash, especially if they involve big-ticket items. Still, whenever possible, paying for purchases with physical currency helps avoid debt and protect liquidity.
Having cash on hand is always a good idea. Cash delivers safety in troubled times. Experts recommend keeping three to six months` worth of cash to cover living expenses when people lose their jobs. For businesses, maintaining liquidity through a recession can making the difference between shutting the doors or surviving the downturn.
A recent CNBC article offered this advice: â€œWhile it`s advised to have a cash cushion no matter the circumstance, if we do enter a downturn, backup savings can come in handy to help handle any unexpected and sudden events such as job layoffs.â€
In addition to maintaining a cash cushion, the article recommended taking a look at spending. Whether you`re a consumer or a business, it`s quite possible you will identify areas in which you can curb your spending. This can help you add to the cash cushion and avoid new debt.
While taking steps to avoid new debt, it also helps to pay the monthly balance on credit cards to improve cash flow. If paying the full balance isn`t possible, review interest rates and transfer unpaid balances to cards with lower rates whenever possible.
Safety in Cash
It`s possible that a recession will not occur and, if it does, it could be short-lived. In any scenario, it is wise to always keep cash reserves. The more liquidity you have, the better prepared you are to weather any situation