5 Strategies for Handling Your Cash Flow and Managing Debt During a Recession

Fears of a recession have loomed large over the past few years. During a recession, consumers often feel the squeeze in terms of their real income. It’s common for companies to pare back their hiring activities, moderate employees’ salary adjustments or even lay off employees.

Consumers might respond to a souring economy by piling on more personal debt to support their ongoing cash-flow needs. That could be problematic for Americans who already have household debts that collectively exceed $17 trillion. Mortgage balances account for about 71% of this outstanding household debt, or more than $12 trillion, along with student loans ($1.57 trillion) and credit card balances ($1.03 trillion).

In its 2023 “Consumer Sentiment Survey—Cost of Living,” CFP Board revealed that 61% of consumers are concerned about the current cost of living. That does not bode well for Americans’ ability to manage their cash flow, especially if we enter a recession. If you’re concerned about your financial situation, here are five strategies to consider before the next recession:

1. Start with tracking your monthly cash flow. Where does your monthly paycheck go? How much are you saving versus spending? How much of it goes to debt payments? A constructive benchmark is to keep your overall debt payments (e.g., mortgage, credit cards, etc.) at or below 36% of your monthly gross income.
2. Be prepared for a cash-flow emergency. More than 6 in 10 consumers live paycheck to paycheck. If a $1,000 emergency arose, would it disrupt your ability to stay afloat with your monthly spending needs? The rule of thumb is to set aside 3-6 months’ worth of fixed expenses in cash reserves at a bank or credit union, so you won’t have to go into debt in an emergency. One effective strategy to build an emergency savings account is to automate your savings through fixed, monthly deposits with your financial institution or through a savings apps.
3. Hit the high notes as hard as you can. If you already have credit card debt, you likely know that the Federal Reserve’s rate hikes since March 2022 have dramatically increased borrowing costs for consumers. The average credit-card rate in the U.S. now stands at 20.6%.
   
   At that rate — even for someone who pays $200 monthly toward her $5,000 balance — it would take 33 months to pay off the credit card balance. To counter high interest rates, consider a balance transfer, which could potentially allow you up to 21 months to pay off a credit card balance at 0%. For multiple credit card balances that cannot be transferred to low-interest options, consider the avalanche strategy to attack debt: Make minimum payments on each credit card, then use any extra funds to pay off each balance over time, starting with the card that has the highest interest rate.
4. Don’t numb the numbers. Saving your credit card information on your favorite shopping sites makes it easy — and painless —to purchase goods and services, without much thought about the process. That can easily lead to overspending and debt. But what if you removed your credit card authorization from one or two of your merchant relationships? Would you save a few bucks each month if you forced yourself to think about individual purchases and actually experienced the pain of paying? If so, how much of a difference would it make over time if you used the cost savings — yes, positive cash flow — to save for your goals, such as funding a 529 education savings account or retirement account?
5. Ask your employer for help. If student loans are causing you financial hardship, look into the CARES (Coronavirus Aid, Relief, and Economic Security) Act. The CARES Act, first enacted in 2020, allows employers to contribute up to $5,250 each year toward each employee's student loans. The employer’s payments are not counted as employee taxable income, which is an added bonus as a retention strategy. Under current law, this option will expire on December 31, 2025.

Managing cash flow and avoiding debt aren’t easy tasks. If you would like to learn more about how to deal more effectively with cash flow or financial stress of any kind, reach out to a CFP® professional today.