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You fill up your grocery cart and gas tank and feel the pain in your wallet. Then you see headlines warning about rising interest rates, skyrocketing inflation, and an impending recession and it’s hard not to feel anxious about the future. But what do all those words really mean? And how can you prepare your finances for potential hardships ahead?

What is a recession?

The National Bureau of Economic Research determines when we’ve had a recession, and defines it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Put simply, the nation’s economy contracts rather than grows. It is considered a normal occurrence in the economic cycle as growth is not always linear.

During a recession unemployment rates rise and it may be more difficult to find work if you lose your job. Borrowing money gets expensive (interest rates rise), and the cost of goods may increase, too (inflation). But a recession is a complicated thing. They’re nearly impossible to predict accurately. Even if experts agree there’s probably one on the horizon, there’s no knowing how severe it will be or how long it will last. Plus, a country doesn’t know it’s in a recession until after it’s begun since declaring a recession involves analyzing historical economic data.

So the mere utterance of the word “recession” is not cause for alarm as there are still many unknowns. It’s wise to prepare, but not a reason to panic.

Why are interest rates increasing?

The Federal Reserve (the central bank of the US) sets the rate at which banks can borrow money. This cost is passed on from the banks to other borrowers (businesses, corporations, or individuals). When interest rates go up, demand for loans or lines of credit decreases. When less money is borrowed, demand for products decreases, which in turn decreases their cost thanks to the law of supply & demand. This is the primary way The Federal Reserve combats inflation.

How can you prepare for a recession?

You prepare for a recession the same way you handle money in more robust economic times – with wise financial choices. Know your money. Make a budget. Implement a savings plan. Pay off debt. Consolidate variable or high-interest debt into fixed, lower-interest loans. Concerned about how to recession-proof your finances? Harborstone Credit Union can help! Schedule an appointment online!