Don’t Panic: Consumer Tips for Weathering Turbulent Markets, Potential Recession
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LendingTree Chief Economist Tendayi Kapfidze shares his insights on how current market conditions will impact consumers.
Concerns about COVID-19 have generated elevated volatility in financial markets in the past few weeks. Stock markets in the United States and around the world have seen large drops, and interest rates have fallen across several financial products. As a result, markets are flashing red on the risk of a global economic recession.
Adding to COVID-19 pandemic fears, an oil price war between Russia and Saudi Arabia has added to the market turmoil. The benchmark 10-year Treasury interest rate tumbled to 0.318% on March 9, a record low.
All of these uncertainties beg the question: What changes, if any, should consumers make to their finances?
7 financial risks and opportunities from the market turmoil
- Money is on sale. Credit, or borrowing money, is a product just like any other, and interest rates are just the price of money from a bank or lender. With the decline in Treasury interest rates and the Fed cut of 50 basis points (bps) (and more cuts expected), it’s like a big Black Friday sale on money. Consumers should call their lenders and request lower rates, or shop around to find better deals.
- Refinancing mortgages. Mortgage interest rates have seen dramatic declines over the past month. Rates were already favorable, with the 30-year fixed rate down nearly 1 percentage point at the end of January from a year ago. Since then, 30-year fixed rates have fallen another 40 bps, and there are 30-year fixed rates currently available under 3%. The 40-basis-point decline represents interest savings of about $10,000 for every $100,000 borrowed.
- Refinance everything else. While most homeowners are aware they can refinance a mortgage, consumers, in general, may not realize you can refinance virtually any type of debt. For example, a balance transfer is refinancing credit card debt from a high-interest card to one with a lower rate. Credit card debt can also be replaced with a personal loan, which often has lower interest rates than a credit card. An auto loan can be replaced with another auto loan or home equity line of credit. Student loans can also be refinanced.
- Shop around. With the rapid moves in rates right now, not every lender is adjusting their interest rate offers to the same extent. For mortgages, the same borrower may be eligible for rates that can vary by more than 50 bps from different lenders. Loan fees also differ considerably, underscoring the importance of shopping around with multiple lenders. For non-mortgage financial products, there are even larger differences as the products are less standardized.
- Stay disciplined. The biggest mistake some people make when they replace one type of debt with another is increasing their overall debt level. To fully benefit from lower rates, don’t overextend your borrowing. If financial discipline is a challenge, consider closing a credit card account after you replace it with another that has a lower interest rate. While this may lower your credit score initially, this step can help you avoid adding even more crushing debt that you might struggle to repay.
- Hold on to your assets. When market volatility rises, the price of certain assets like stocks or real estate can fall. As a result, it can be tempting to panic and try to sell these assets to prevent future loss. However, because of the nature of both the housing and stock markets, the values of these assets usually rebound. In other words, consider holding on to your assets — even if their value falls — while you wait for markets to recover.
- Speak to your financial advisor. If you have one, speak to a financial advisor who can help you make measured decisions and not succumb to emotion. It’s also a good time to review your financial plan to improve your chances of meeting your financial goals.
5 tips to prepare for a potential recession
The financial markets are reflecting the risk that an economic recession is coming to the U.S. The rise in COVID-19 cases is creating both supply and demand shocks throughout the economy. In particular, social distancing is slowing consumer spending, which has been the strongest part of the economy over the past year. In fact, consumer spending contributed 1.76 percentage points of the 2.33% in GDP growth in 2019. A decline in consumer spending raises the risk of recession.
While many people can — and do — make it through recessions with little impact, recessions can be difficult to overcome. It’s important to remain proactive in the face of a potential recession and take adequate steps to properly prepare for one.
Here are five tips to make living through a recession more manageable:
- Recession-proof your career. While a recession tends to bring layoffs, boosting your skills and increasing your value in your current role may help you escape widespread cuts. Scaling up your skills and experience can also make you more marketable to employers if you do need to find another job. Finally, pay close attention to your company’s financial performance — if it’s consistently missing business goals, cutting benefits or hours and laying off employees, consider looking for another job at a company that has more stability.
- Create alternative income sources. Sometimes, working a side hustle can be a big help during a recession since it allows you to bring in extra money when you need it the most. Even if your alternative income sources, such as driving for a rideshare service or renting out an extra bedroom, don’t bring in large amounts of cash, some extra income is always better than none.
- Increase emergency savings by optimizing spending habits. It’s crucial to build an emergency savings fund in any situation, but especially if you’re afraid that you’ll lose your job in a recession. While it can be difficult to find extra money to put away, there are some tools that can help. For example, refinancing your home loan to get a lower interest rate could help lower your monthly mortgage payments and sock away the monthly savings for emergencies. Beyond that, save money by keeping a close eye on your finances and avoiding unnecessary spending, such as eating out or making big purchases.
- Tap government programs if needed. From unemployment benefits to the U.S. Department of Agriculture’s Supplemental Nutrition Assistance Program, or SNAP, the government has numerous programs designed to help you get back on your feet if you’re hit hard during a recession. Check your local and state government websites regularly, as well as news reports, for additional programs that may be announced specifically in response to the COVID-19 pandemic.
- Don’t panic, and be smart. While talk of a recession can be scary, it’s important not to let it control your life. Every recession that has hit the U.S. has eventually ended. Stay level-headed and financially responsible.