While the exact parameters that distinguish an economic downturn from a true recession are debatable, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The typical rule of thumb for determining whether a period constitutes a recession is whether it includes two or more consecutive quarters of decline in a country’s gross domestic product (GDP). Often, these periods aren’t officially labeled as recessions by economists until they are already well underway or have ended entirely. It’s important to remember that recessions are natural and temporary phases in the business cycle, and though they may come with hardships, they are typically succeeded by periods of economic growth.

In this article, we’ll cover:

• What happens in a recession
• Downturns vs. recessions vs. depressions
• What causes recessions
• Recessions and the business cycle
• Signs of a recession
• How a recession may affect you
• How to invest in the face of a recession

What happens in a recession

Recessions are complex events that can be triggered by various factors, from financial crises to external shocks. While each recession has distinct characteristics and causes, varying in length and severity, a few trends are common across all of them.

• GDP falls: GDP, which measures the total value of goods and services produced in a country, typically drops during a recession, indicating a weakening of the nation’s overall economic health.
• Economic activity declines: Businesses might reduce production due to decreased demand, leading to a slowdown in various sectors of the economy.
• Unemployment rate rises: As companies cut back on production or even shut down, job losses become more prevalent, leaving a higher percentage of the population without employment.
• Interest rates may decrease: The Federal Reserve might choose to lower interest rates in an effort to boost economic activity.
• Consumer spending shrinks: Uncertainty and financial concerns during a recession often lead consumers to cut back on their expenditures, further slowing down the economy.

Economic downturns vs. recessions vs. depressions 

Economic downturns, recessions, and depressions are all periods of economic contraction. Ultimately, their differences lie in their duration, intensity, and impact on the broader economy.

• Economic downturns: These are short-term declines in economic activity, often accompanied by bear markets. While they can lead to recessions, it’s possible for the economy to recover before that happens. The U.S. has experienced a number of downturns throughout history, with bear markets lasting an average of about 9.5 months, though many are much shorter. 
• Recessions: Going into a recession means that an economic downturn extends into a more prolonged and pronounced drop in economic activity. Since 1980, the U.S. has faced five recessions of varying durations, with the shortest lasting just six months and the longest extending to 18 months. On average, U.S. recessions have lasted about 11 months.
• Depressions: Depressions are the most extended and severe economic contractions. The U.S. has experienced only one depression, known as The Great Depression, which began with a profound stock market crash in 1929 and lasted for about a decade. This period was marked by extreme unemployment, a significant drop in consumer spending, and widespread bank failures.

Examples of past recessions

Each recession in the U.S. has been unique in its cause, duration, and impact on the global economy. Three significant recessions identified by the NBER in the recent past have left a lasting mark on the country’s economic landscape.

• Dot-Com Recession: Occurring between March and November 2001, this seven-month-long recession was a result of the bursting of the dot-com bubble of the 1990s. The overvaluation of tech companies led to a sharp stock market decline, impacting the broader economy.
• The Great Recession: Spanning from December 2007 to June 2009, the Great Recession was primarily caused by the subprime mortgage crisis, leading to significant job losses and a global banking crisis. Lasting 18 months, it’s the longest recession the U.S. has experienced since World War II.
• COVID-19 Recession: Triggered in early 2020 by the global outbreak of the COVID-19 pandemic, this recession saw a sharp decline in economic activity due to lockdowns, travel bans, and business closures. While its exact duration is still debated, the most severe stages occurred between February and April 2020.

What causes recessions

No two recessions are identical. They often arise from a unique combination of factors that work together to turn a mild economic downturn into a pronounced economic contraction. A few factors often contribute to the onset of a recession. 

• Sudden economic shocks: Unexpected events that disrupt the normal flow of the economic cycle,  like natural disasters, terrorist attacks, or health crises, can shake consumer and business confidence, triggering a reduction in spending and investment.
• Excessive, widespread debt: When households, businesses, or governments take on too much debt, they may need to cut back on spending in order to pay it off, leading to a significant dip in overall economic activity.
• Asset bubbles: Bubbles occur when the prices of assets, like real estate or stocks, soar far above their fundamental value. Asset bubbles often arise in a specific industry or sector. When these bubbles inevitably burst, those who invested heavily can face significant losses, companies go out of business, and a ripple effect may impact other sectors of the economy as well, leading to an overall economic slowdown.
• Excessive inflation: During periods of high inflation, prices of goods and services rise too quickly, eroding consumer purchasing power. The Federal Reserve may then choose to raise interest rates in an effort to curb inflation, which can result in reduced borrowing and spending.
• Runaway deflation: The opposite of inflation, deflation is a prolonged drop in prices. While it might seem like a good thing, deflation can lead to reduced consumer spending as people wait for prices to fall further, causing a vicious cycle of economic contraction.

How recessions fit into the business cycle

The business cycle is a natural ebb and flow of economic activity, characterized by periods of growth and decline. Recessions are a pronounced form of natural contractions, representing a significant dip in the cycle. The NBER plays a pivotal role in determining the start and end dates of U.S. recessions by breaking the business cycle into four primary phases:

• Expansion: Marked by increasing economic activity, the expansion phase is a period of economic growth and prosperity. This is an ideal economic stage for business growth, often featuring rising employment rates and bolstered consumer confidence. As demand increases, businesses raise prices, causing inflation.
• Peak: The peak of the business cycle is the zenith of the expansion phase, where economic activity reaches its maximum, right before starting to fall off. This phase is characterized by high levels of production, employment, and the highest prices, with no room for further expansion.
• Contraction: Following a peak, the economy starts to slow down. This period sees a decline in GDP, employment, and other economic indicators. If this contraction is prolonged and severe, it can lead to a recession.
• Trough: The trough is the lowest point of the contraction phase, when economic activity bottoms out before starting to rise again. From here, the business cycle moves back into the expansion phase, marking the beginning of economic recovery.

Signs of an impending recession

While it’s impossible to predict recessions with absolute certainty, economists and financial experts often turn to specific indicators that hint at economic turbulence ahead. 

• Inverted yield curve: Typically, long-term bonds have a higher yield compared to short-term bonds. But when short-term bonds yield more than long-term ones, it’s called an inverted yield curve. Historically, this inversion has preceded recessions, as it indicates a lack of economic confidence.
• Declining consumer confidence: When consumers are pessimistic about the future of the economy, they tend to spend less and save more. A sustained drop in consumer confidence can lead to an economic contraction.
• Increasing unemployment: A rising unemployment rate can be a sign that businesses are cutting back on staff due to decreased demand or revenue. Persistent high unemployment can contribute to reduced consumer spending, which may exacerbate an economic slowdown.
• Stock market drops: While stock markets can be volatile regardless of the larger economic landscape, a prolonged and significant drop in stock prices overall can sometimes precede a recession and might be a sign of continued decline.

How a recession may affect you (and how you can prepare)

A recession affects the average person in a variety of ways. You might feel a financial pinch, as job security becomes uncertain and daily expenses seem to loom larger. While it’s natural to be concerned, there are proactive steps you can take to navigate challenging times and prepare for an impending recession.

• Build an emergency fund: An emergency fund acts as your financial safety net, ensuring you have funds to cover unexpected expenses or income loss. Especially during uncertain times, having three to six months’ worth of expenses can provide peace of mind and financial stability. 
• Pay off debts: Reducing debt, especially high-interest credit card debt, can free up income and reduce stress on your personal finances. By tackling your debt, you’re not only improving your financial health, but also making yourself less vulnerable during an economic downturn. 
• Start saving money: Plan for what a recession would do to your current budget and savings goals and take action ahead of time. By cutting down on expenses and setting aside a portion of your income regularly, you’re building a buffer that can be invaluable during tough times.

How to invest if you’re worried about a recession

When economic clouds gather, it’s natural to feel uneasy about your investments. Remember that market fluctuations are a part of the investment journey, and before making any hasty decisions, you might want to consult with a financial advisor who can provide tailored advice for your situation. Instead of panicking when the stock market dips, consider these strategies to safeguard, and possibly even grow, your portfolio during a recession.

• Ride out the downturn with long-term investing: Historically, markets have shown resilience over extended periods. Focusing on long-term investing may allow you to weather short-term volatility and potentially benefit from the average stock market return over time.
• Seek out “recession-proof” stocks and funds: Some sectors tend to be more resilient during economic downturns. Identifying and investing in stocks that tend to hold value in a recession might help shield your portfolio against market turbulence. 
• Consider defensive stocks for your portfolio: Defensive stocks are shares in companies that provide essential goods and services, like utilities or consumer staples. Because of their relatively stable demand, adding them to your portfolio may reduce your vulnerability in the face of economic flux.
• Capitalize on inflation before it drops: Some securities can actually benefit from inflation. Investing in things like Treasury Inflation-Protected Securities (TIPS), I-bonds, and value stocks when inflation is rising before a recession might offer a hedge against decreasing inflation rates later. 
• Evaluate short-term investment options: If you’re apprehensive about locking your money into long-term investments during uncertain times, consider short-term, lower-risk options. Instruments with fixed interest rates, such as CDs and T-bills, can be a way to secure higher interest rates before they potentially drop in a recession. 
• Diversify your portfolio: Spreading your investments across various asset classes and economic sectors can reduce risk. Especially during a recession, a diversified portfolio can help mitigate losses and position you for growth when the economy recovers.

Holding steady in the face of a recession

Economic downturns and recessions are inherent phases of the business cycle. Though they present challenges, remember that they’re followed by seasons of growth and rejuvenation. When you understand what a recession is, you’ll be more prepared to anticipate downturns and prepare.

As an investor, maintaining a clear strategy, staying informed, and resisting the urge to make impulsive decisions can help you pave the way for long-term success. With a good grasp of the cyclical nature of the economy, you can navigate the turbulence of recessions with more confidence.

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If you’re unprepared for an economic downturn, you’re likely to experience consequences with potentially negative long-term financial impacts. But with some proactive readiness, you can avoid the financial vulnerabilities associated with job loss, financial instability, and other recession-driven hardships. These eight steps will help you make a plan to ride out an economic decline with confidence.

In this article, we’ll cover:

1. Understanding your finances
2. Creating a budget to stick to
3. Building your emergency fund
4. Getting rid of high-interest debt
5. Living below your means
6. Avoiding new financial commitments
7. Securing your career
8. Why you should continue to invest

1. Review your finances

First, evaluate your current situation. Compile a comprehensive overview that includes income, expenses, liabilities, and assets.

• Income: Total up your income from all sources, including your salary and any additional money you bring in from things like side gigs, child-support payments, and government benefits programs.
• Expenses: List all your monthly expenses and how much you spend on them. Categorize them into two groups: necessities like rent/mortgage, utilities, and groceries, and discretionary spending like entertainment, dining out, and treats.  
• Debt: Gather the current balances and interest rates of all your debts. Be sure to include every kind of debt, such as credit cards, auto loans, personal loans, medical debt, mortgages, and student loans. 
• Savings and investments: Add up the balance in all your savings and investment accounts; don’t forget to include any retirement accounts you have.  

This information allows you to lay out a financial plan to guide you through a potential recession, as well as look ahead to long-term goals. Consider creating a visual representation like a spreadsheet or financial statement that allows you to assess your situation at a glance. 

Having all of this information in one place can keep you from making panicked financial decisions in the face of economic uncertainty. Determine where you could make cutbacks if needed now, instead of scrambling to make ends meet if your income decreases or disappears later. 

2. Create and stick to a budget

Making a budget is a fundamental step in planning how to prepare for a recession, particularly if you’re new to managing your personal finances. When uncertainty looms, there’s no better time to track and adjust your spending habits. Understanding your cash flow today and where you could potentially cut back tomorrow is vital, especially if your job is recession-sensitive. 

Start building your recession-friendly budget by subtracting all your monthly expenses from your income; this will tell you whether you’re living within your means or need to trim expenses. With that information in hand, you can establish monthly spending limits for each expense category and set savings goals. This is the time to decide if you want to cut down on your spending in certain areas so you can bolster your emergency fund so you have more of a cushion in case of recession. 

You may want to use the 50-30-20 budget guideline to simplify the process. Assign 50% of your income to essential living expenses like housing, food, utilities, and debt. Devote 30% to things you’d like to spend money on but could ultimately do without, and 20% to savings goals, your emergency fund, and long-term investments. 

3. Build your emergency fund

Financial curveballs like unexpected expenses and job loss could have a bigger impact during an economic downturn. A solid emergency fund provides a safety net you can use to handle those crises without going into credit card debt or wiping out your other savings.

Building an emergency fund can be especially important during a recession, when economic decline can undermine job stability. The rule of thumb is to save up three to six months’ worth of living expenses so you can cover your bills in case your pay is reduced or you get laid off. While you might be able to receive unemployment benefits if you lose your job, they may not cover all your essential expenses or float you for as long as you need. Unemployment usually replaces only half your income and ends after 26 weeks in most states, so chances are you’ll need the extra money in your emergency fund to get by until you find a new job. 

While three to six months of living expenses may seem like a lot to save up, you can make it feel less daunting by breaking that larger goal into smaller ones based on priorities. You might start by saving enough to pay rent for three months, then setting aside enough for your essential bills, and so on. Just getting started is what matters most.

If you want to grow your emergency fund faster, consider cutting some discretionary expenses and putting that money toward your emergency savings. If you get a bonus, tax refund, or other windfall, add it to this savings goal. Keeping your fund in a high-yield savings account can also help amplify your savings by earning interest, as well as ensuring your money is easy to access when you need it.

4. Prioritize paying off high-interest debt

High-interest debt is expensive, and it can keep you stuck in a rut of never-ending monthly payments that strain your budget and undermine your savings goals. Credit cards, personal loans, unsecured lines of credit, and payday loans are generally classified as “bad debt” because they tend to have high interest rates and steep late fees; the interest rates are also variable, meaning they could skyrocket at the lender’s discretion. Bad debt can even negatively affect your credit score if you’re late on a single payment. 

If you’re worried about how to prepare for a recession, getting out of debt as soon as possible may be high on your priority list. And paying off credit card debt might be extra important: the average credit card rate in the U.S. is 27.80% as of November 2023. Even if you currently have a low rate, credit card issuers often hike their rates when the Federal Reserve raises interest rates during periods of inflation. 

Consider attacking your high-interest debt before recession strikes by using the avalanche method. This debt-repayment strategy prioritizes paying off your highest-interest debts first in order to reduce the overall amount you spend on interest over time. As you pay off each debt, the extra money rolls down to the next, and the impact becomes greater over time. Here’s how works:

1. Organize your debts by interest rate, highest to lowest.
2. Make the minimum monthly payments on all of your debts, except for the highest-interest one.
3. Every month, pay extra on your highest-interest debt. 
4. When the first debt is paid off, put the amount you’d been paying on it toward the debt with the next-highest interest rate. 
5. Repeat the process until all of your debts are paid off.  

Here’s an example of the avalanche method in action. Imagine you have the following debts and can afford to put an extra $110 a month, over and above the minimum payments, toward paying them off.

After eight months, the credit card would be paid off, so you’d start paying an extra $150 on the personal loan; $150 is the total of the credit card’s minimum payment and the extra avalanche payment.

Once the personal loan is paid off, you’d put an extra $190 toward the unsecured line of credit until all your debts are satisfied.

5. Spend less and stay frugal

While you don’t need to deprive yourself of every little luxury, it does help to adopt a frugal mindset while preparing for a potential recession. Reducing discretionary expenses can help you put more money toward your emergency savings. 

When looking for ways to save money, use the financial plan and budget you’ve already created to distinguish between needs and non-essential wants, then make some choices in the name of frugality. Dining, entertainment, and impulse buying are some of the most common culprits in a ballooning budget, so many people find that reducing these expenses can have a big impact.

• Limit dining out: Meal planning and cooking at home takes more time than dining out or ordering in, but it saves money on food costs in the long run. You might be surprised at how much you really spend in this category. If your parent ever said, “We have food at home” when you wanted to stop at the drive-through, you might want to adopt that adage yourself.
• Reduce entertainment expenses: Spending on events, travel, and hobbies can add up quickly, but you can have fun without breaking the bank. Keep an eye out for low-cost entertainment alternatives like home streaming services, free community events, or hobbies that don’t require expensive supplies. 
• Suspend subscription services: There are a vast number of options for entertainment delivered right to your home: movie and music streaming services, mobile apps and games, monthly product deliveries, and many more. In many cases people rarely use most of the services they subscribe to. Review all of your subscriptions and consider canceling or temporarily suspending those that don’t truly feel worth the money.
• Curb retail therapy: Everyone wants a little treat from time to time, but impulse buys and regular retail therapy can take a toll on your budget. Remove the temptation to buy on impulse by deleting your payment information from websites that store it, and carry only cash when you’re shopping in person so you can’t spend more than you have in your pocket. Institute a 24-hour rule before you buy something that’s not in your budget; you might find that the urge to spend fades if you wait a day. 

6. Avoid new, big financial commitments

When preparing for a recession, signing up for new expenses puts you on the hook for things you might not be able to afford if your cash flow starts to dry up. Avoid making new financial commitments, especially those with high monthly payments or interest rates. Forgo taking on new debt, stick with your roommates or your parents for a little while longer, and say no to pouring money into risky new ventures. 

• Mortgages: The beginning of a recession often sees rising interest rates, so the timing isn’t great for locking yourself into a fixed-rate mortgage. Instead of buying real estate, save for a downpayment so you can buy that house when conditions are more favorable. 
• Car loans: Getting more miles out of your current car instead of buying a new one keeps you from signing up for payments you may not be able to afford if recession hits. Funnel the money you’d spend on those car payments into your emergency fund or a sinking fund you can use to repair your existing vehicle. 
• Large personal loans: Going into debt should be a last resort when preparing for a recession, and that includes borrowing significant sums of money for non-essential purposes. If you need a personal loan to buy something, it may be wiser to put that purchase on hold and save up for it instead so you’re not committed to monthly payments and interest.
• Business ventures: Starting a new business is a risk under any circumstances, but even more so during a recession. An economic downturn is likely to significantly curb consumer spending, leaving you without the customers and cash flow you need to succeed. Use this time to shore up your business plan and save so you can launch your venture when economic indicators are more favorable.

7. Cushion your career

Financial preparedness includes both enhancing your job security and focusing on career development, just in case you need to make an unexpected change. When you make yourself indispensable in your current position, you might be in a better position to weather potential layoffs. But if you do wind up in the market for a new job, ongoing professional development efforts could help you get noticed and hired faster. In either case, it’s important to know your industry, stay up to date with trends, learn new skills, and network before a recession hits. Consider taking these steps to stay ahead:

1. Diversify your skill set: Identify and acquire skills that are in demand across various industries. Diversifying your skill set can make you more adaptable during economic downturns, especially if your specific industry takes a harder hit.
2. Update your resume: Job searching can be stressful, especially when you haven’t updated your resume in a while. Give yourself some peace of mind and polish it up now. You’ll be more prepared to make a move, whether your company decides to downsize or an unexpected job opportunity pops up.
3. Network, network, network: Landing a job often comes down to knowing the right people. Building a strong network of professional relationships can lead to new opportunities or fortify your job security in the midst of a recession. Stay in touch with colleagues on LinkedIn, join professional organizations, and attend industry conferences to grow your network.
4. Stay informed about your industry: It pays to know what’s going on. Don’t ignore company news and industry reports. Stay informed about the health of your industry overall and monitor economic indicators so recession doesn’t take you by surprise. 
5. Deliver your best work: It may be difficult to stay positive and productive at work with economic uncertainty on the horizon. However, consistently delivering high-quality work, being flexible with company changes, and projecting optimism can enhance your professional reputation with your colleagues and boss. It can also help you obtain the glowing recommendation you need to snag your next job.

8. Continue to invest what you can

Perhaps the most important thing for investors to remember when recession looms is this: don’t panic. Even when the stock market is in a slump, don’t abandon your investing plans. While it may be stressful to see the value of your portfolio drop, remember that economic downturns don’t last nearly as long as periods of economic growth. A long-term investment strategy is intended to help you ride out market volatility and natural fluctuations in the business cycle, including a recession. 

As long as your spending is under control and your emergency fund is solid, continuing to invest now can help you work toward retirement and other far-off goals. Keep making your regular contributions to 401(k) and IRA. If you want to make adjustments to the holdings in your brokerage account, you might consider defensive stocks and other investments that may perform well in a recession to further diversify your portfolio. You might also want to talk with a financial advisor about the options that best align with your goals and risk profile. 

When recession looms, take the long view

Determining how to prepare for a recession involves taking stock of where you are now as well as your long-term goals. When you’re uncertain about the immediate future, it can help to get a firm handle on your personal finances to build a solid budget, emergency fund, and plan for paying off debt. 

At the same time, remind yourself that economic recessions are temporary and recovery will follow. Staying invested throughout the ups and downs of the market cycle is key to reaching long-term investing success. 

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So, is now a good time to invest? The answer is that it certainly can be, as long as you consider the following:

• Your financial goals are long-term. The market moves in cycles, and history has shown us that it’s very likely to recover in time. If your retirement savings goals are years into the future, you’re more likely to cash in on future market gains.
• You have idle cash at the end of the month. Idle cash is money that’s not needed for expenses or emergency savings, and isn’t earning interest that outpaces inflation. Those funds could be invested for potential returns in the future. 
• You’ve built up a healthy emergency fund. Having a cash reserve on hand to keep you afloat during a financial emergency can prevent you from incurring further debt. If you have a comfortable cushion, you may feel confident putting money into the market.

In this article, we’ll cover:

• What’s going on in the stock market
• Reasons to invest in the here and now
• An investing strategy for any market

The current state of the market

Several factors are contributing to the state of the economy in 2023. The labor market is tight, pushing wages higher and, in turn, partially driving inflation. As interest rates increase, the likelihood of a recession rises too. S&P 500 companies have recently reported a 4.8% year-over-year decline in earnings, and it’s expected to drop even more this year. While defensive stocks, like utilities, consumer goods, and healthcare, continue to show stable earnings, experts predict the stock market overall will remain volatile throughout 2023.

Reasons why investing now is a good idea

Despite the relative volatility of the market, investing isn’t necessarily a bad idea. In fact, some experts suggest that in times like these, it can be beneficial to develop a long-term investment strategy, taking advantage of lower stock prices and holding out for returns in the future. As investment always comes with a certain amount of risk, it’s essential to do your homework before you dive in. 

It’s about time in the market, not timing the market

Nobody can predict the market. While there are many indicators you can watch to identify trends, it’s impossible to foresee what will happen today, tomorrow, or next month. So don’t try to time the market by guessing which stocks will rise or fall in value. Market fluctuations are natural, and the only way to combat them is by staying in the market. That’s why time in the market, aka keeping your money invested long-term, is likely to be more successful than timing the market. For example, from October 2007 to March 2009, the S&P 500 fell more than 46%. But a bull market took over in 2009, allowing the S&P to climb more than 250% by 2019. Investors who stayed in the market eventually saw the returns they desired.

There’s potential for high investment returns in the long term

A long-term approach to investing can allow for compounding growth over time. And that can set you up for success with large financial goals like retirement savings. Generally, the longer term the investment, the higher the returns. You might consider investing in stocks and funds that have a history of performing well even in a volatile market. That said, investors interested in meeting short- to mid-term financial goals do have some lower-risk options. Bonds, Treasury bills, or Real Estate Investment Trusts, might be the right conservative shorter-term investment options with less volatility than stocks and funds. Banking products with higher interest rates, like CDs or high-yield savings accounts, might also be of interest if you want your money to grow in the short term. 

3 Tips for investing regardless of the market

Invest regularly. Diversify your portfolio. Focus on the long term. These three tips can serve you well regardless of what’s happening with the market. It’s a simple investment strategy that will help you prioritize long-term financial health and cut out the noise of short-term stock market volatility.

1. Invest regularly

Leverage dollar cost averaging (DCA) to your advantage. Rather than trying to time the market with a lump sum investment, build wealth over the long term by investing a set amount of money on a regular basis. DCA can help reduce the risk of volatility and relieve some of the stress that comes along with investing. It also helps you diversify the average cost of shares, so you can continue to invest regardless of stock prices. Many beginning investors find it helpful to budget a certain amount of money to put into their brokerage account each month

2. Diversify your portfolio

Diversifying is one of the most critical things you can do to safeguard your portfolio from market downturns or financial crises. Diversification means spreading your investment portfolio across different types of assets to reduce overall risk. Those different investments may include stocks, bonds, ETFs, mutual funds, real estate, or even global assets that go beyond the US stock market. Within each of those asset classes, you can find even more ways to diversify; for example, if you invest in stocks, you may wish to spread your money among several different sectors. Remember to ensure that your diversified portfolio balances risk versus reward according to your risk tolerance, time horizon, and financial goals.

3. Invest for the long term

Uncertain markets call for a long-term investor’s mindset. Gains will take time, so focus on holding stocks for the long term. A few ways you can keep your eye on the future instead of stressing about the current ups and downs include:

• Focus on retirement savings and other far-off financial goals that are 10 or more years in the future
• Create a strategy based on a diversified portfolio and stick to it; changing your plans with every shift in the market adds stress without necessarily reducing risk
• Don’t fixate on economic news if it causes you anxiety. Stay informed about your investments, but don’t allow every market dip to induce panic
• Set up automated investing so that you can stick to your investing plans and manage your portfolio passively 

To invest or not to invest? Try the Stash Way

Even if you’re just learning how to invest in stocks, funds, and other financial products, the ups and downs of today’s stock market don’t have to be a deterrent. All you need is awareness of your risk tolerance and a thoughtful investment strategy like the Stash Way: invest regularly, diversify your portfolio, and invest for the long term. Market fluctuations are inevitable, but Stash can help you navigate your way toward future financial success.

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 As businesses such as restaurants, salons, car dealerships, and more have shut their doors to stop the spread of Covid-19, nearly 3.3 million Americans have lost their jobs (temporarily or not). Here are some tips on how to budget when the economy is volatile: 

Build your budget

If you don’t have a budget, now is the time to create one. You may not be able to control the news, but you can and should control your spending. And a budget can act as a financial blueprint, guiding your everyday life and spending habits, helping you stay on track with saving and investing goals.

There are various different budgets you can use including the 50-30-20 budget (a percentage-based budget) or the zero-sum budget. No matter which one you choose, start by figuring out how much money you have coming in each month. Then determine how much you spend on essential or fixed expenses, how much you spend on variable or nonessential expenses, and how much you want to save. 

As you’re taking into consideration a volatile economy, you may want to allocate more of your monthly budget to savings and cut down on nonessential expenses to prepare for how your circumstances may or may not change. 

Cut the nonessentials

Now is the time to cut down on nonessential spending, which includes spending that you do on activities or items that you want but don’t necessarily need such as Netflix, Hulu, a spiral vegetable shredder, or a workout bike you might never use.

“Work out how different crisis financial situations would play out,” says Jason Patel, founder of career prep company Transizion, based in Washington, D.C., says. “Determine what you would need if you brought in only 50% of what you currently bring home. Then try 75% and so on.” In the current economic situation, Patel suggests cutting anything that doesn’t relate to health or medicine, rent, groceries, and getting to your job.

Of course, If you’re going to be stuck inside for days at a time, you still want to leave room for some non-essential expenses, like ordering takeout or renting a movie. But maybe cut down on extraneous online shopping like buying new clothes or stuff for your home. 

Access your rainy day fund

Don’t be afraid to dip into your rainy day fund or emergency fund if you experience some bumps in your financial life. That’s what these funds are for. If you don’t have one, think about creating one and start contributing to them regularly. 

Remember that a rainy day fund should contain at least $500 to $1000 for you to draw on to pay down credit card debt or your rent if you have a sudden change in income. Your emergency fund should contain enough money to carry you through three to six months of all your expenses, should something such as a layoff or illness happen.

Be careful with credit cards

It’s too easy to rely on credit cards if you have a sudden drop or loss in income, but that’s probably not a good idea. At some point, you’ll need to pay off that debt. “You might find yourself wanting to lean on credit cards to get you through a financially tight period,” says Nathan Grant, a senior analyst for Credit Card Insider, Syracuse, New York. “But avoid using them for purchases you can’t pay off within a month so you don’t affect your credit and waste unnecessary money on interest fees.” If you don’t have the cash to pay off the debt, don’t spend it in the first place. 

Grant also recommends staying on top of any existing debt that you might already have so that you don’t let it get out of control. He suggests making sure you’re at least paying the minimum amounts due on any credit cards or loans to prevent damage to your credit. Consider attacking your debt with the avalanche, or the snowball method. Having debt can make matters worse if you hit a rough patch.

Budgeting is just the start

The best way to weather the storm is to prepare your own finances and stay the course. 

A budget can help show you the way by providing a financial structure.

Think of your financial plan as a building block that can also include longer-term goals such as investing and saving for retirement. 

As you manage your money, consider the Stash Way, which encourages you to think and prepare for the long-term, while investing small amounts regularly in a diversified portfolio.

The post How to Budget For a Rainy Day appeared first on Stash Learn.

If you don’t know what a yield curve is, and how it can affect the economy, we’ll explain it to you.

What’s a Treasury?

The U.S. government issues notes and bonds called Treasuries, which have varying lengths of time to maturity, ranging from months to 30 years.

The 10-year Treasury is considered the benchmark bond issued by the U.S. government, and its rate tends to be reflected in other interest rates. The federal government has issued trillions of dollars worth of 10-year Treasuries, which it uses to finance its operations. Treasuries are considered among the safest bond investments because they are backed by U.S. government.

But there are others, such as the 5-Year Treasury, and the 2-Year Treasury.

Bonds, a quick explainer

Treasuries are bonds.

Bonds are different from stocks. Bonds are debt issued by companies or governments, that are essentially IOUs to investors. That IOU is the yield.

Bonds have three key components—a maturity date, a price, and an interest rate, sometimes called a coupon rate. The interest rate stays the same, while the price of a bond typically fluctuates.

Together the price and the interest rate combine to give you the yield of the bond, which is the actual money you earn on the investment. While the interest rate of the bond is fixed, the yield will fluctuate, based on market conditions.

A bond’s price moves in the opposite direction of its yield. As the price of a bond increases, perhaps due to investor demand, its yield will fall. If its price falls, its yield will go up.

Learn more >> Find out more about bonds

What’s a yield curve?

Treasuries have something called a yield curve, which is essentially a graph depicting the yields of the various bonds, from the shortest maturities to 30 years.

In normal economic conditions, the bond yield curve arcs upward.

Longer-term debt, such as the 10-year Treasury, typically has a higher yield than shorter-term debt, because there is more risk associated with it.

Think about it: The longer you hold a bond, the more can happen. We’re talking about economic risks, primarily, such as increasing inflation and the possibility of recessions. The bond market tends to compensate investors with a higher yield if they tie up their money for years at a time.

What’s an inverted yield curve?

An inverted yield curve is when the yield for longer-term bonds falls below the yield for shorter-term debt.

That happened this week for the first time in a decade as the yield for the 5-year Treasury fell below that of the 2-year Treasury.

Market conditions can cause the yield of certain bonds to go down from time to time. That’s been happening with longer term Treasuries. Their yields have dropped as investors have snatched them up, driving up their current price. The yield on the 10-year Treasury, for example, has decreased to 2.9% from 3.23% in November 2018.

At the same time, yields on shorter-term debt have also been increasing as the Federal Reserve has gradually increased the Federal Funds Rate since early 2016.  Interest rates, and hence the yields, for all bonds, are benchmarked to the Federal Funds Rate, and they tend to rise and fall together.

The yields of shorter term bonds are particularly sensitive to the Fed’s moves.

Why does an inverted yield curve matter?

The Federal Reserve tends to lower interest rates when the economy weakens, and that drives down the coupon rate, or interest rate, of new bonds when they’re issued.

Investors are currently buying up bonds with longer maturities—such as the 10-year Treasury—at their current coupon rates because they fear that the economy will weaken and interest rates will drop going forward. Lower interest rates will result in lower coupon rates for these bonds in the future.

So what could this all mean?

An inverted yield curve has happened prior to each of the major recessions since the 1960s according to experts. The last time it inverted was before the 2008 financial crisis. While the economy is due for a recession, an inverted yield curve can’t predict when one will happen. It could be a year or two years, or not at all.

Learn more >> How to prepare for a recession

Think long-term

Yield curves bend and flatten and they can drive volatility in the short-term, it’s part of how the market works. You can’t predict it, but you can have a smart strategy by investing for the long-term to help you weather storms.

Thinking long-term is part of the Stash Way.

The post Why is Everyone Talking About Inverted Yield Curves? appeared first on Stash Learn.

Ten years ago this week, an investment bank called Lehman Brothers collapsed, ushering in the worst financial crisis the U.S. had experienced since the Great Depression.

The bank’s failure set off a chain reaction with other banks and the stock market, stoking a financial panic that led to a severe recession in the U.S. and ultimately throughout the globe.

But a decade later, the U.S. economy is in full recovery, and many of the world’s other economies have recouped their losses too. Unemployment is at a near-record low. Housing prices have rebounded from their depths. And workers’ wages are rising at the fastest pace since 2008.

Still, it’s important to remember our financial history, and to see what caused the worst recession in nearly 80 years, and to understand how things have changed.

Here’s a look back at the most important events:

Why was Lehman Brothers’ failure such a big deal?

In September 2008, Lehman became the first in a series of big banks to collapse, following risky bets in the housing market. The banks became illiquid—essentially a term that means they ran out of money to fund their operations.

Lehman Brothers was one of the oldest and most prominent investment banks in the U.S., founded in 1844, with assets worth hundreds of billions of dollars.

An investment bank is different from a commercial bank, where you do your daily banking. Investment banks specialize in giving corporations, governments, and other entities access to markets, by allowing them to sell stocks and bonds. They also help new companies sell their shares to the public in a process called an initial public offering.

Government officials discussed a bailout for Lehman but ultimately decided against it. As the bank collapsed, it set off a ripple effect that endangered or bankrupted dozens of other financial institutions, including investment and commercial banks and insurance companies, including AIG, Merrill Lynch, Washington Mutual, and Wachovia.

Good to know: An investment bank called Bear Stearns failed months before Lehman, but before it could go bankrupt, it sold itself to the bank JPMorgan Chase, following pressure from the U.S. government.

In hindsight, many financial experts say the federal government could have limited financial damage to the economy if regulators had rescued Lehman Brothers.

Ultimately, hundreds of other banks failed in the two years following Lehman’s meltdown, and the government stepped in with $700 billion in funding to either rescue them or shut them down, in a program that was known as the Troubled Asset Relief Program (TARP).

The Housing Crisis

The financial crisis had its roots in the housing market, specifically with home mortgages.

In the 2000s, banks loosened their credit standards for mortgages and sold trillions of dollars of high-dollar loans to risky borrowers. These were known as “subprime mortgages,” because they were given to borrowers with either bad or low credit scores. Investment banks packaged the loans together and sold them to investors, who had little insight about the underlying risks of these securities.

The investments were also resold as something called derivatives, which are complex trading instruments. These were referred to as “collateralized bond obligations” (CBOs), and they grew so complicated, that few people actually knew what they contained.

Ultimately, a tidal wave of subprime mortgage borrowers defaulted on loans they could not afford when home values started to fall in 2007. That set off a chain reaction with banks that had loaned money that would never be repaid.

These unpaid mortgages became known as “toxic assets,” because they were essentially trillions of dollars in worthless debt.

Financial institutions had more debt than cash, and wound up short of funds to pay their investors, and even customers.

Impact on the stock market

In the six months that followed the crisis, indexes such as the S&P 500, which represents 500 of the largest company stocks in the U.S., fell 40%. Investors lost trillions of dollars of wealth.

Good to know: The S&P 500 has since regained its pre-recession value, gaining 130% over the last decade, with total annual returns of 11%. Investors who kept their money invested over the last decade are likely to have made back all of their losses.

The federal government took action in the months following the crisis. Here’s a look at some of its key actions.

Quantitative easing. The nation’s central bank, known as the Federal Reserve, played an active role in rescuing the U.S. economy during the financial crisis of 2008. It did this—through a process that came to be known as quantitative easing—by lowering interest rates, purchasing government bonds known as U.S. Treasuries, thereby pumping money into the banking system.

Federal regulation. In an attempt to prevent banks from taking risky bets with customer money, Congress passed something known as the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

More about Dodd-Frank

Dodd-Frank established new regulations to ensure that banks wouldn’t seize up and threaten the foundation of the economy again in the case of a financial crisis. Regulators concerned themselves particularly with large banks, deemed “Too Big to Fail,” whose collapse could jeopardize the entire financial system.

Among the new rules, most big banks were required to keep more money on hand to make sure they had a cushion in the event of another financial crisis. They also were forced to undergo strict “stress tests” to ensure they could handle a sudden economic downturn.

Dodd-Frank also restricted the kinds of business activity banks could pursue. Remember the mortgage disaster? Something called the Volcker Rule, a part of the new regulations, prohibited banks from taking risky bets with customer deposits, as they had done in the run-up to the mortgage crisis.

Our economy in 2018

So where are we now?

Ten years into a recovery, the stock market is at an all-time high and housing prices have returned to their pre-recession levels. Unemployment is at a 20-year low, wages are rising. Consumers are spending again.

The Fed has ended its quantitative easing program and is increasing interest rates once more. Meanwhile, Congress has begun rolling back some of the regulations affecting banks.

For the time being, the economy appears in sound shape. But it took many years to get here, and experts are still watchful about the next financial crisis.

“What we all learned in that particular panic is that we’re all dominoes,” Berkshire Hathaway founder and world-famous investor Warren Buffett recently told CNBC in an interview about the financial crisis. “And we’re all very close together.”

The post The Great Recession Was 10 Years Ago: What Happened? appeared first on Stash Learn.

The Senate voted Wednesday to ease regulations put into place by the Dodd-Frank Act of 2010, aimed at making the banking industry safer for the economy, and more secure for consumers.

Specifically, the Senate voted to increase the size of banks that are considered “Too Big to Fail” to $250 billion, from $50 billion, relaxing regulations on dozens of banks. We’ll get into what “too big to fail” means later, and which banks are included.

Senators also voted to exempt more than two dozen banks from rules that previously required them to have contingency plans in place in case they run into financial trouble, CNN reports. And they also voted to free banks with $10 billion in assets or less from restrictions that prevent them from taking risky bets with their deposits, according to reports.

But let’s start at the beginning.

What was the Dodd-Frank Act?

Officially known as the Dodd–Frank Wall Street Reform and Consumer Protection Act, it was named after Chris Dodd and Barney Frank, the two senators who helped shepherd the bill through Congress in 2010.

The bill was a response to the subprime mortgage crisis in the financial services sector, where banks unwisely loosened credit standards for home loans to problematic borrowers, resulting in record defaults and the severe recession that began in 2008.

Dodd-Frank established new regulations to ensure that banks-which are responsible for lending and making sure money is available to consumers–wouldn’t seize up and threaten the foundation of the economy.

The biggest banks, whose potential failure could have an outsize impact on the economy, were subject to the strictest regulations. Banks such as JPMorgan and Citigroup and Bank of America, for example,  have trillions of dollars of assets, and their businesses are sprawling, ranging from consumer lending to auto finance, insurance and mortgages.

Among the new rules, most big banks were required to keep more money on hand to make sure they had a cushion in the event of another financial crisis. They also were forced to undergo strict “stress tests” to ensure they could handle a sudden economic downturn.

Dodd-Frank also restricted the kinds of business activity banks could pursue. Remember the mortgage disaster? It was the result of years of selling subprime mortgages to consumers who couldn’t afford them, and who eventually stopped paying back their loans.

Banks began packaging those risky mortgages together into a trading tool called derivatives, which were then sold to investors. The derivatives grew so complex, that few people actually knew what was in them. When consumers stopped paying back their mortgages, these derivatives became worthless.

Dodd-Frank ended speculative activities like this for banks.

What are derivatives?: Derivatives are complex securities that rely on an underlying asset–in this case, mortgages–but take a bet either for or against the asset with something called an option or futures contract. These contracts wager on the value of the asset at some future point in time. For the average investors, derivatives are considered risky as they can encourage the irresponsible use of debt, known as leverage.

Among the new rules, most big banks were required to keep more money on hand to make sure they had a cushion in the event of another financial crisis.

What critics of Dodd-Frank say

Critics of the Dodd-Frank law have argued that the regulations have restricted growth in the banking industry. And numerous banking industry experts have said the capital requirements have especially hurt smaller banks, which have less money to begin with.

In particular, smaller banks have said they’ve had a hard time doing business, due to the increased regulatory costs, and requirements to have more cash on hand as a financial cushion.

What does “Too Big to Fail” Mean?

“Too Big to Fail” refers to financial institutions deemed to be “systemically important”. That  essentially means any large financial institution whose failure could imperil not just the banking industry, but the entire economy. There are roughly 40 such companies, including U.S. Bank, Capital One, and the Bank of New York.

The phrase became popular in the aftermath of the financial crisis, which began in 2008. Some of the nation’s banks were on the verge of failing as a result of the subprime mortgage disaster, leading to a global cascade effect.

One of the most famous events leading to the crisis involved the failure of investment bank Lehman Brothers, formerly one of the most prominent banks on Wall Street. It closed its doors overnight, prompting a panic that the entire banking sector was running out of money and on the verge of collapse.

In the aftermath, more than 500 banks closed or had their assets seized by the Federal Deposit Insurance Corp. (FDIC), which insures customer deposits. To deal with the crisis, the federal government created something called the Troubled Assets Relief Program (TARP), which spent $700 billion bailing out the banks.

What’s happening now?

The Senate passed its measure on Wednesday with bipartisan support, 67-31: in other words both Democrats and Republicans voted for it.

But progressives, including Senator Elizabeth Warren (D-Mass.) have voiced objections.

“Washington is poised to make the same mistake it has made many times before, deregulating giant banks while the economy is cruising, only to set the stage for another financial crisis,” Warren told the Washington Post.

In addition to increasing the size of banks regulated by Dodd-Frank–now only about a dozen of the largest banks in the U.S. will be forced to comply, including JPMorgan, Citibank, Wells Fargo and Bank of America–the measure also frees the smallest community banks from requirements that they gather data on loans to consumers. That data is used by regulators to ensure banks make loans to minorities.

The Senate bill will also require credit bureaus Equifax, Experian, and Transunion to offer consumers free credit freezes.

The bill heads next to the House of Representatives, which is expected to pass its own version.

The post What’s Dodd-Frank? Why Changes in Regulations Matter to You appeared first on Stash Learn.