How to prepare for a recession if you’re struggling to pay rent, food and utilities. Follow these steps.

By Emma Ockerman

If you’re stressed about finances, you’re not alone. But there are small ways, even for people with low or moderate incomes, to protect themselves

Low-to-moderate income Americans, struggling with higher prices and economic insecurity, could face darker days ahead.

Many economists and leaders are predicting a recession within the next year – if the US isn’t already there – as the Federal Reserve raises interest rates to bring down inflation. With borrowing costs and consumer goods prices rising, job cuts and lower consumer spending could be on the horizon.

It can seem like a terrifying prospect for people struggling to cope with higher rents, increased food costs and wages that can’t keep up. Already, 65% of employed consumers were living paycheck to paycheck in September, up 5 percentage points from a year ago, according to research results from LendingClub and PYMNTS released Monday.

“When things aren’t going well financially, it’s embarrassing and shameful,” said Terri Friedline, associate professor of social work at the University of Michigan. “A lot of people are struggling financially, struggling to pay their bills or have overcharged their accounts.”

“Debt is a fairly common experience in the United States under capitalism,” she added. “So hopefully there’s a collective group of people that you can trust to feel like you’re having a shared experience and that you don’t have to go it alone.”

The pandemic has also offered lessons in the benefits of mutual aid and the safety net provided by his community. Grassroots groups stepped up earlier in the pandemic to help communities of color in Chicago deal with food insecurity, fight evictions in New York City and offer financial aid in Philadelphia.

While some pandemic-era self-help groups have gone out of business, it may be wise for people to try to seek help close to home, even if it’s just to feel less isolated.

All is not gloomy, of course. Unemployment remains low – 3.5% in September – and President Joe Biden has said that if a recession does occur he expects it to be “very mild”. Yet the jury is out on whether a looming U.S. recession would prove short and mild or more severe.

If things go wrong, however, there are a few steps financially stressed people can take to save a little more, get help, and avoid falling prey to the kind of financial mistakes that could cost them years. .

People are struggling to pay for necessities, credit card debt is rising, and consumers are dipping into their savings. Taking control of your finances in such difficult circumstances can seem impossible, but even the smallest steps can be worth taking, experts say.

Erase the debt

Pay off your debts whenever possible, according to Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a nonprofit organization. Although consumers are increasingly using credit cards to cope with rising prices, this type of debt is also becoming more expensive: the average credit card interest rate was 18.9% last week. last and is expected to increase further, according to Bankrate’s CreditCards.com.

“Debt, especially high-interest debt, becomes an even bigger problem when times get tough – when your hours are reduced, when you’re laid off, when there are other financial shocks due to a potential recession or other economic setback,” McClary said.

For people with multiple credit cards and tight budgets, focus on the card with the highest interest rate — information that can usually be found on a monthly bank statement.

Adjust your expenses

It’s also a good time for consumers to start tracking their household spending, if they’re not already doing so, McClary said. This kind of awareness, while potentially daunting, allows people to react quickly to any changes in their income and figure out where they can find savings. A person can subscribe to multiple streaming services like Netflix (NFLX), Apple TV+ (AAPL), or Disney Plus (DIS) that offer similar content, for example, or pay a monthly fee for something they don’t. don’t use much anymore.

“It shouldn’t be about self-deprivation,” McClary said. “It’s more about self-preservation. You can keep fun things in your mental health and wellness budget, and you should, but you can find opportunities to hone in on some of those expenses.”

Limit impulse purchases

That said, people should always think hard about what their money is worth and try to limit opportunities for impulse purchases, given that they are often sold a product on TikTok or Instagram. A Bankrate survey from July underscored the consequences: while nearly half of social media users said they had made an impulse purchase of a product they saw on a social media platform, 64% said they would have liked to resist at least one of these elements.

Consumers may want to adopt a “cooling off” period before making a purchase to cut down on unnecessary spending, McClary said. Tools that make impulse buying more appealing — such as installment services like buy now, pay later — should be approached with caution, if not avoided, by people on a tight budget.

For buyers who do most of their spending in cash, tracking their spending is just as important, said Scott M. Kahan, president and chief financial planner of Financial Asset Management Corporation, a financial planning and asset management firm. profitable investments.

“If you take money out of the ATM and use that money, more often than not people don’t know where that money is going,” Kahan said. “We used to tell people – and still do sometimes – that when you spend a lot of money, take a little piece of paper or a little notebook with you and a pen, or do it on your cell phone. .”

“Just track where you spend your money,” he added.

Build your emergency savings

Once someone has an idea of ​​their spending habits and works to pay off their debts, they may also want to start saving a little money in the bank each month, even if they are small, to create an emergency fund. Generally, the recommendation is to accumulate three to six months of emergency expenses, but this is not realistic for some people.

“I usually say, ‘Pick something really important to do each month,'” said J. Michael Collins, professor of personal finance at the School of Human Ecology at the University of Wisconsin-Madison. “Maybe it’s your rent or your mortgage. Try to have at least that much in savings and keep it somewhere safe but liquid, where you can access it in an emergency if you need it. .”

People should also try to make sure the savings are in banks or institutions that don’t have overdraft fees or other charges that could deplete their few assets, said Odette Williamson, a lawyer at the National Consumer Law Center.

Talk to your landlord about rent

A very important reason to try to save money for housing: rents have increased since last year, and significantly in some markets.

Spending more than 50% of income on rent — a reality for 24% of renter households that disproportionately affects families of color and low-income families — is associated with higher eviction rates and financial insecurity increased, according to the Pew Charitable Trusts

Once evicted, families can lose their possessions, face negative impacts on their mental health and job performance, and put a black mark on their rental history, which can make it harder to find housing. according to the Princeton University Expulsion Lab.

Households struggling with housing payments should talk to their landlords to find a compromise, if possible.

At the start of the pandemic, the Louisiana Fair Housing Action Center and Southeast Louisiana Legal Services created a script for tenants seeking to start a dialogue with their landlord about rent specifically related to the economic impacts of the virus.

The Department of Housing and Urban Development has recommended contacting landlords about financial issues as soon as possible. Although the circumstances behind potential missed payments may have changed, the benefits of communication could still be there.

Low-income tenants can also find the nearest legal aid office here if they have legal questions about an eviction case they are facing.

Avoid these pitfalls

It helps to know what might be predatory or a waste of money. Scammers take advantage of struggling people in difficult times, so consumers should be wary of spending money on services they can actually access for little or no cost.

“There are companies that will charge you a fee and consolidate all your debts,” Kahan said. “Many times you can work with groups that will do it for free.”

The Biden administration’s federal student loan forgiveness program, which can erase up to $10,000 of a borrower’s debt if they were earning less than $125,000 a year in 2020 or 2021, or until to $20,000 if a borrower has received a Pell grant, also has a free online application.

The federal government has already warned of scams related to this debt relief, but the Department of Education only intends to contact people from email addresses such as [email protected], noreply @debtrelief.studentaid.gov or [email protected] com if it needs follow-up information to verify a borrower’s eligibility or application.

Consumers should also be wary of services that promise to improve their financial well-being if they spend a little money – especially credit repair companies and debt settlement companies – and ask themselves if they suit them, McClary said.

“I’m not saying the services offered by these companies aren’t suitable for all situations — there are definitely situations where people can benefit from them,” McClary said. “But first you have to know what you’re getting into.”

(MORE TO BE FOLLOWED) Dow Jones Newswires

10/26/22 1959 ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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