Everything is Crashing and What to do Next

The 2022 economy has already proven to be quite the ride, but we aren’t out of the woods yet. Everything seems to be crashing and many families are left wondering what to do next.

With a possible recession looming, many families are wondering how to survive the challenging times ahead. Between the highest inflation rates in over 40 years, soaring gas and food prices, and pretty much everything else we are currently facing, things may become difficult. But, there are actions that can be taken to not only survive, but strive during a down economy.


Starting with gas prices, we are halfway through 2022 and the average cost for gasoline in the United States has surpassed $5 per gallon for the first time in history. The war between Russia and the Ukraine, European countries are being forced to look elsewhere for their supply of gasoline. Previously, Europe received 40% of their supply from Russia, but are now looking to the Middle East as well as the United States to make up that difference. Additionally, prices are being driven up as we are currently in our first heavy-travel summer here in Michigan since the beginning of the pandemic, causing an even heavier demand for gasoline while still struggling with a low supply. In fact, looking at the overall cost of energy, from gasoline to running a furnace, we are up a whopping 34.9% from this time last year.


While a near 35% increase in gas prices is a huge jump, housing prices in many cities are up a staggering 60% to 200% year over year. Looking specifically at Metro Detroit, the average home value has climbed 107% between 2014 to now, with the largest spike taking place between 2022 to 2022. This spike in home values can be seen as reported by the New York Times, that the average American made more money from their home value increasing in 2021 than they did from working at their place of employment.


Not helping with daily costs, groceries are up 11.9% year over year, with the most noticeable increases taking place on protein packed items such as meats and dairy. Of course, produce and many other (if not all) items have also risen in cost, making it less affordable for American families to eat fresh, healthy foods and driving many towards less nutrient rich, cheaper processed foods.


Sticking with the trend of basically everything becoming more expensive and less affordable, rent prices have also drastically increased. The average cost for a two bedroom apartment at the time of this article is just over $2,000. That’s a 26.8% year over year increase per rent.com. The price for a one bedroom apartment is not much cheaper, coming in just above $1,700. Locally in Metro Detroit, we seem to be hovering in the $1,400 to $1,800 range for rentals, depending on the property type and location. Making matters worse, wage growth has increased at a measly 5.2% to 5.9% making it much more difficult for working Americans to keep up with rising prices pretty much everywhere they look.


Interest rates have also been rising on everything from home mortgages and car loans, to credit card rates. Just six months ago it was possible to get a 30 year fixed-rate home loan at an incredibly low 2.75%. Unfortunately, those days are long gone and if you missed the bus, you’re now walking. Today we are seeing those same loans receiving a 6% interest rate, and we will likely be seeing that increase to 7% or above by the end of 2022. If you are in the market to purchase a home, get pre-qualified with a lender NOW to lock in your rate and save whatever money you can. If you need help finding a lender, we have a great one in house that we can recommend. 


All of this comes back to the one thing that has been hovering over us like a stubborn rain cloud on a sunny day, Inflation. Inflation has had a major hand in driving up prices over the past number of months, as we have seen an increase of nearly 8.6% year over year. This in comparison to the slower increase of wage growth has been a thorn in everyone’s side as we try to move through everyday life. Unfortunately, the only solution that the Fed has to battle the high inflation rate is to increase interest rates again - this is in addition to the 0.75 of a point increase that just took place. 


The effect of this increase is also being seen in the stock markets. Year to date, the Nasdaq, Dow, New York Stock Exchange, Russell - all of them are down 14% to 20%, depending on which index you are looking at. These effects are also being seen outside of the US, as many other countries are seeing stock values decrease heavily. We have officially entered a bare market on the heels of the inflation report and increase in interest rates. Numerous technology based stocks, such as Peleton and Netflix, are seeing even larger losses - being down 27% or more year to date.


With all of this being said, there are only two things that can now happen. We will either enter a recession, or not.


So, assuming the worst and we do enter another recession, how worried should we all be? Taking a look at the three of the larger US recessions of the past, being the Great Depression (1929-1933), Great Recession (2007-2009), and the Covid-19 Recession (Feb 2020 - Apr 2020), we can learn quite a lot. In the wake of each recession, regardless of the cause or how  bad the economy and unemployment got, we fully recovered in every regard. Additionally, with every recession, the length of each recession has become shorter and shorter, with the recovery time becoming faster and faster. In fact, with the exception of the Great Depression, from the worst to the least severe recession we have experienced as a nation, every Dow has recovered from its lowest point back to 100% in less than two years. This is not to make light of previous or potentially present recessions, but to make a point that even though it will prove difficult for many and feel like a long time if we do enter another recession, we will quickly recover and rise above.


On the other hand, it may yet be a possibility that Jerome Powell and the Fed will be able to thread the needle on interest rates in an attempt to greatly reduce the current inflation, then bring things back down quickly enough so as to not cause a recession. This has yet to be seen, but we will remain optimistic until proven otherwise.


Assuming the worst and that we will soon in fact be dealing with another recession, there are a number of things that you and your family can begin doing NOW to help protect your pockets and ease the pains of dealing with a down economy.


First, be careful of discretionary spending. This refers directly to prioritizing your needs and the needs of your family over “wants” that in the end, don’t really provide a substantial benefit. We all like to indulge in certain things, whether it be that $5 latte, an expensive gym membership, or dining out, etc. In doing so, we may only be spending a few dollars here or there, but over a period of time this discretionary spending can add up extremely quickly. Instead, tighten the belt on your wallet a bit and keep doing so until you have held every expense accountable. Make coffee at home to go, switch to a cheaper gym membership, and lessen the amount of times per month that you eat out. This in itself will save you a large amount of money over time. 


To take this to the next level, use that money saved to invest into something that will benefit the future for you and your family, such as a 401K increase, a Roth IRA if you qualify, or the market in general. When times are tight, this may seem like a strange time to suggest investing extra into stocks, however it is for good reason. As shown by the research done by Morgan Housel, author of the international best selling book titled “The Psychology of Money”, on any given day the market as a whole will go up 56% and down 44%. However, over any 10 year period, the market has a 100% chance of going up. Investing in the market is a long-term plan and very few, if anyone, gets rich overnight. Slow and steady wins this race. By investing when stocks are down, you are actually putting yourself further ahead than purchasing when the market is good. Just be sure to choose low fee EFTs or Mutual stocks, as the fee will just be more money out of your pocket and low fee ETs and Mutuals actually perform better over a long period of time.


Next, have an emergency fund. Not only does this provide a safety net for you and your family in the case that something were to happen like an injury, or major house repair being needed, it will also provide you with peace of mind. With the absence of having an emergency fund as a safety net, we as humans feel the psychological pressure of stress and safety. Stress can be a major contributor to poor physical and mental health, but can also have adverse effects on relationships. In times of a recession when families need to come together as a team, any added stress that drives a wedge between family members can be extremely destructive. Work together to face challenges, then be sure to celebrate together as any milestones are achieved.


Another recommendation to help protect yourself and family during a recession is to beef up your resume. Hopefully, you won’t need it. However, opportunity only comes to those who are ready for it. Due to the large number of people who have left the workforce over previous months, there is still a genuine shortage of good people and talent across all industries. It is these people who are able to hold their jobs through a down economy, and often command raises and/or get better jobs, so being ready for a good opportunity is key. In fact, looking at the last jobs report, people who took the opportunity to switch jobs (even doing the same job at a different company) averaged a 32% pay increase from one job to the next.


Finally, if you already have a house - keep it. You most likely will not be able to keep your current interest rate and with interest rates doubling over the past 90 days, you will be paying a lot more if you are planning on buying to upsize to a larger or nicer home. If you currently do NOT have a house, but have the ability to buy one - DO IT NOW! Even with the higher interest rates, the average monthly cost of rent or a mortgage are very close. With taxes and insurance the house may be a tad more, but it will benefit you greatly in the end. First, homeowners receive about $2,000 to $2,500 back on their annual taxes. Second, you will be paying on something that is YOURS and building equity while doing so. Third, the home will continue to go up in value. The average American currently lives in their home for roughly 11 years. Even if home prices drop a bit during a recession, they always regain their value and by the time you are ready to sell, you will be way on the other side of a recession and will have built up a large amount of equity both from the home appreciating in value and paying down your mortgage during that time. Additionally, rent prices will continue to increase and have done so at an average of 5% per year. By locking yourself into a fixed rate mortgage, your interest rate will never go up. In fact, when interest rates go back down (which they eventually will) you can refinance your mortgage for a cheaper rate, saving yourself and your family even more money.


Recessions can without a doubt put a lot of unwanted pressure on businesses, individuals and families alike, but it's during these times that we can also learn the most about ourselves and what we’re truly made of. It's the difficult times where we are forced to really examine our lives, health and even our spending habits, that we can readjust and work together as needed to grow as individuals, and in the end are better off from it.

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