Michelle Singletary: 7 ways a recession could be good for you financially
In his first inaugural address in March 1933, President Franklin D. Roosevelt said: “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.”
It was the Great Depression. The unemployment rate was more than 2%. An estimated 12 million people were out of work, about one-fourth of the civilian labor force.
“More than 11,000 of 24,000 banks had failed, destroying the savings of depositors,” according to the National Archives.
Fast forward to now, and as bad as things are – rising interest rates, high inflation, stock market tumbling – the economy hasn’t imploded as it did during the Great Depression.
I have to say this because, as Roosevelt pointed out, fear itself can lead to actions that worsen your finances. While many people are hurting, there may be ways to cushion the downside.
Here are seven silver linings if we are heading into a recession.
1. Housing prices may finally come down to reasonable levels. The average rate for a 30-year fixed mortgage jumped to 6.7% last week, according to data released by Freddie Mac.
Higher mortgage rates may result in sellers in many markets lowering their asking prices so that buyers can qualify for the loans.
With cheaper loans gone, there will be fewer bidding wars to drive up home prices.
2. Savings rates are up. At least one bright side of the Federal Reserve raising rates to fight inflation is banks are paying people more to hold their money. My credit union has a special 20-month offer on a certificate that would pay me a 3% annual percentage yield.
“Many prospective savers may not have yet noticed that yields have been on the rise,” said Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate.com.
Be sure to shop around, Hamrick said.
“Why leave money on the proverbial table when you can have it in your account? The key is making it a priority to have access to funds when and if an urgent development occurs,” he said.
By the way, no, you shouldn’t stop contributing to your retirement plan. Historically, over time, the market recovers. If you bail now, you will miss the recovery.
3. I bonds inflation rate might go even higher. The Series I Savings Bond was created as a hedge against inflation. Until the end of October, the bonds are paying 9.62%.
There are two components to the return for an I bond – a fixed rate and the inflation rate. The fixed rate, which right now is zero percent, applies for the 30-year life of the bond.
The fixed rate of newly purchased bonds and the semiannual inflation rate are announced by the Treasury Department each May and November.
If inflation stays high, I bonds could be paying more come November.
To buy an electronic I bond, you must set up an account at TreasuryDirect.gov. Individuals can purchase up to $10,000 in electronic I bonds in a calendar year.
4. The dollar is king. Although a lot is in flux, if you have plans to travel overseas, your dollar may go a lot further. Last week, the British pound fell to an all-time low against the dollar.
5. Unemployment is still relatively low. People with jobs and money to spare can spend on luxuries such as a vacation.
Despite higher prices and rising interest rates, millions of Americans have been taking leisure trips.
More than half of Americans plan to travel for one or both of the holidays this year, even though airfares will be 43% higher than last year, according to Hopper, a travel booking app.
However, the unemployment rate did rise to 3.7%, according to the Bureau of Labor Statistics. So, if you’re worried about your job security, cancel any vacation plans you might have over the holidays or even for summer 2023
6. Your used car is worth more. If you’re looking to upgrade to a newer car, and your car is in fairly good condition, you’ll get more for your trade-in.
Used car and truck prices jumped 7.8%, according to the latest data from the U.S. Bureau of Labor Statistics. Unfortunately, new car prices were up 10% from a year ago.
7. Student loan forgiveness is coming. Roosevelt used his executive power to wage war against the economic emergency gripping the United States.
President Biden is doing something similar by forgiving student loan debt to help struggling borrowers. Biden announced a one-time forgiveness program that will wipe out up to $10,000 in federal student loan debt and up to $20,000 for Pell Grant recipients for individuals who earn $125,000 or less per year or less than $250,000 for married couples.
The Biden administration also announced last year a time-limited waiver to help forgive more debt under the Public Service Loan Forgiveness program.
Act fast to sign up for the waiver. The deadline is Oct. 31.
Of course, times are tough – and for some people, much more than others. But remember that fear will not help you make wise financial decisions.