NAVIGATING ECONOMIC SHOCKS || How to Weather the Storm and Protect Your Purchasing Power
Wow, the economy isn't looking good.
As reported by Bank of America, a 'rolling blackout' of defaults has already begun as companies grapple with tighter financial conditions. And it's not just businesses that are struggling. In Q1 2023, the delinquency rate on U.S. credit card payments reached 2.43%, indicating a rise in missed payments. In the same period, the number of Americans filing for unemployment benefits increased to 245,000. It seems that layoffs are on the rise as well. To top it all off, the US’s government debt has climbed to a staggering 118.77% of GDP in Q1 2023.
If you're one of the lucky ones who've managed to keep your job, congratulations! But don't get too comfortable. More challenging times may lie ahead. With rising interest rates and increasing business defaults, job security is a luxury few can afford.
An Equifax report released this week showed that households are starting to miss mortgage payments, an item that people usually pay off first before they pay other bills. With another rate hike last week from the Bank of Canada, some predict it will be the last straw.
If you think about it, we’ve enjoyed a bull market where everything was on the up since the 2008 recession recovery—that’s fifteen years of relative stability except the pandemic, where the government printed an excessive amount of money. Now, the government is trying to correct the inflation they caused by raising interest rates, effectively driving the economy into the ground. My guess is this one’s going to hurt precisely because most of the workforce in their 20s and early 30s have never witnessed a real recession.
Surviving the Economic Storm: Enhancing Your Skills
So, what should you do? Your first step should be to enhance your skills. In an uncertain economy, the more value you can add to your company, the more irreplaceable you become. Remember, companies may need to cut headcount due to rising costs and the advent of AI. Make sure you're not on the chopping block.
Secondly, plan for the worst. While we can't predict the exact trajectory of the economy, the evidence points towards a looming recession, potential bank collapses, and dollar devaluation. You need to keep your job and figure out how to retain more money in your pocket. If you're wondering how bad it could get, consider the 1981 rate hikes that pushed interest rates to 20%.
FOUR WAYS TO PreservE Your Purchasing Power
Now, how can you maintain your purchasing power in this climate? Here are four things you can do to keep more money in your pocket and lose less to inflation without bearing a ton of risk.
Be brutal about cutting expenses. If it’s not something you absolutely need to survive, cut it out.
Begin with a budget. Track your income and expenses to understand where your money is going. Once you have a clear picture, you can start cutting back on unnecessary expenses. Eating out less, reducing shopping, and considering cheaper entertainment options are just a few ways to tighten the purse strings.
Shop around for better deals. Whether it's finding a better cell phone plan or securing a higher interest rate on your savings, every dollar counts. Banks are offering promotional rates to attract new deposits, so take advantage of these offers. Everybody is shopping around right now. And if you aren't doing it, you're getting left behind. I'm already saving on my cell phone plan by cutting the spending by 40%. I'm also getting a better interest rate from moving my savings to another bank’s high-yield savings account.
If you have some extra money, consider investing. This can help grow your wealth over time and protect your purchasing power from inflation. However, remember to educate yourself before jumping into the investment world to avoid unnecessary losses. And only invest the amount that you are willing to lose because markets are unpredictable, and there’s no guarantee of all upside during a volatile period like what we’re going through right now.
Consider a side hustle. While we are advocates of work-life balance, sometimes you gotta do what you gotta do to survive. I’m predicting that times will get tough, and would it make sense to sugarcoat it and say that life can still be easy when times are tough?
When the cost of a meal has gone up by 20% to 30% in the past year, wages have not matched the same increase because companies can’t just go to consumers and add the same increase to their price tags without risking customer attrition. Here’s how that would work out: fewer customers = lower revenue = lower or no profits = no business = no employees. This is why restaurants are going out of business even though they’ve raised prices. The much higher post-pandemic operating costs (labour, food, and more) eventually killed the business.
Look on the bright side. A positive of a side hustle is that with rising living costs, an additional source of income could provide much-needed relief. You might be tempted to ask for a raise from your current employer, but with increasing business bankruptcies, your employer might be in a similar boat. To put things into perspective, the number of businesses filing for bankruptcy rose by 20% in the US in 2022.
The economic signals may be daunting, but remember, forewarned is forearmed. By taking proactive steps now, you can navigate these challenges and safeguard your financial future.
