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Average U.S. Credit Card Debt in 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Updated – March 26, 2019

Credit card balances are at all-time highs. Rate increases by the Federal Reserve  will mean consumers pay billions more in interest charges.

We’ve updated our statistics on credit card debt in America to illustrate how much consumers are now taking on.

  • Americans paid banks $113 billion in credit card interest in 2018, up 12% from the $101 billion in interest paid in 2017, and up 49% over the last five years, as Fed rate increases have been passed on to consumers. MagnifyMoney analyzed FDIC data through December 2018 for each bank whose deposits are insured by the FDIC.
  • The four Federal Reserve rate increases in 2018 meant most credit card Annual Percentage Rates (APRs) increased a full percentage point more last year. Even without any interest rate increases in 2019, we estimate the increase in interest paid in the coming will continue to grow, putting Americans on track to pay over $122 billion in interest in 2019, an additional $9 billion more than the $113 billion currently being paid annually. Our analysis of the impact of Fed rate hikes found credit card rates are the most sensitive to Fed rate hikes, rising more than twice as fast as mortgage rates.
  • Average APRs on credit card accounts assessed interest are now 16.86%, up nearly 4 percentage points in five years, according to the Federal Reserve.

  • Total revolving credit balances are $1.03 trillion as of January 2019. The figure, reported monthly by the Federal Reserve, is the total amount of revolving credit balances reported by financial institutions, the overwhelming majority of which are credit and retail card balances, according to the Consumer Financial Protection Bureau (CFPB). As of March 2018, non-card-related revolving balances such as overdraft lines of credit were approximately $74 billion, according to our analysis of the FDIC data used by the Federal Reserve to calculate total revolving balances.

  • Americans carry $682 billion in credit card debt that is not paid in full each month. This estimate includes people paying interest, as well as those carrying a balance on a card with a 0% intro rate. We based the estimate on a CFPB study of credit card account data that found 29% of total credit card balances are paid off each month, implying 71% of credit card balances revolve each month. We applied the percentage to the Federal Reserve’s revolving credit balance data less $74 billion in non-credit card revolving debt to reach $682 billion in credit card balances carried over month to month.
  • 43.8% of credit card accounts aren’t paid in full each month, according to the American Bankers Association. Those who don’t pay in full tend to have higher balances, which is why the percentage of balances not paid in full (71%) is higher than the percentage of accounts not paid in full (43.8%).
  • The average credit card balance is $6,348 for individuals with a credit card, according to Experian. This excludes store credit cards, which have an average balance of $1,841. Both figures include the statement balances of individuals who pay their balance in full each month.

Credit card use

  • Number of Americans who actively use credit cards: 176 million as of 2018, according to Transunion.
  • Average number of credit cards per consumer: 3.1, according to Experian. That doesn’t include an average of 2.5 retail credit cards.
  • Number of Americans who carry credit card debt month to month: 70 million.

Credit card debt

The following estimates only include the credit card balances of those who carry credit card debt from month to month — they exclude balances of those who pay in full each month.

  • Total credit card debt in the U.S. (not paid in full each month): $686 billion
  • Average APR: 16.86% (also excludes those with a 0% promotional rate for a balance transfer or purchases)
    • This estimate comes from the Federal Reserve’s monthly reporting of APRs on accounts assessed interest by banks.

Credit card balances

The following figures include the credit card statement balances of all credit card users, including those who pay their bill in full each month.

  • Total credit card balances: $1.03 trillion as of January 2019, an increase of 3.2% from January 2018. This includes credit and retail cards, and a small amount of overdraft line of credit balances.
  • Average credit card balance: $6,358, according to Experian (excludes retail credit cards, which have lower balances. The average consumer has $1,841 in balances on retail cards and we estimate combining all consumers with retail or credit card debt the average is approximately $5,000 per individual). All averages include those who pay their bill in full each month.

Who pays off their credit card bills?

According to the American Bankers Association, in 2018, accounts that are paid in full versus carrying debt month to month comprise the following mix of open credit card accounts:

  • Revolvers (carry debt month to month): 43.8% of credit card accounts
  • Transactors (use card, but pay in full): 30.4% of credit card accounts
  • Dormant (have a card, but don’t use it actively): 25.8% of credit card accounts

Delinquency rates

Credit card debt becomes delinquent when a bank reports a missed payment to the major credit reporting bureaus. Banks typically don’t report a missed payment until a person is at least 30 days late in paying. When a consumer doesn’t pay for at least 90 days, the credit card balance becomes seriously delinquent. Banks are very likely to take a total loss on seriously delinquent balances.

Delinquency rates peaked in 2009 at nearly 7%, but in 2018 they have remained below 2.5%.

Debt burden by income

Those with the highest credit card debts aren’t necessarily the most financially insecure. According to the 2016 Survey of Consumer Finances, the top 10% of income earners who carried credit card debt had nearly twice as much debt as the average.

However, people with lower incomes have more burdensome credit card debt loads. Consumers in the lowest earning quintile had an average credit card debt of $2,100. However, their debt-to-income ratio was 13.9%. On the high end, earners in the top decile had an average of $12,500 in credit card debt. But debt-to-income ratio was just 4.8%.

Income Percentile

Median Income

Average CC Debt

CC Debt: Income Ratio

0%-20%

$15,100

$2,100

13.9%

20%-40%

$31,400

$3,800

12.1%

40%-60%

$52,700

$4,400

8.3%

60%-80%

$86,100

$6,800

7.9%

80%-90%

$136,000

$8,700

6.4%

90%-100%

$260,200

$12,500

4.8%

 

Although high-income earners have more manageable credit card debt loads on average, they aren’t taking steps to pay off the debt faster than lower income debt carriers. In fact, high-income earners are as likely to pay the minimum as those with below average incomes. If an economic recession leads to job losses at all wage levels, we could see high levels of credit card debt in default.

Generational differences in credit card use

In 2017, Generation X surpassed the baby boomer generation to have the highest credit card balances. Experian estimates that on average, Generation X has a balance of $7,750 per person, 21.94% more than the national average ($6,354). Boomers carry nearly as much as Generation X with an average balance of $7,550.

At the other end of the spectrum, millennials, who are often characterized as frivolous spenders and are too quick to take on debt, have nearly the lowest credit card balances. Their median balance clocks in at $4,315. The youngest generation, Gen Z, has the smallest average balance of $2,047 per person.

How does your state compare?

Using data from the Federal Reserve Bank of New York Consumer Credit Panel and Equifax, you can compare median credit card balances and credit card delinquency.

State

Credit Card Debt Per Debtor

Credit Card Debt Per House

Alabama

$3,710.56

$7,198.48

Alaska

$5,879.85

$11,406.91

Arizona

$4,299.70

$8,341.42

Arkansas

$3,289.01

$6,380.69

California

$4,569.51

$8,864.85

Colorado

$4,898.56

$9,503.20

Connecticut

$5,171.89

$10,033.47

Delaware

$4,338.88

$8,417.42

Florida

$4,318.35

$8,377.59

Georgia

$4,727.46

$9,171.27

Hawaii

$5,330.46

$10,341.09

Idaho

$3,791.84

$7,356.18

Illinois

$4,412.71

$8,560.65

Indiana

$3,624.05

$7,030.65

Iowa

$3,169.16

$6,148.17

Kansas

$3,854.05

$7,476.85

Kentucky

$3,457.67

$6,707.88

Louisiana

$3,767.91

$7,309.75

Maine

$3,905.56

$7,576.78

Maryland

$5,287.61

$10,257.96

Massachusetts

$4,720.53

$9,157.83

Michigan

$3,458.51

$6,709.51

Minnesota

$4,257.26

$8,259.08

Mississippi

$3,204.95

$6,217.60

Missouri

$3,763.46

$7,301.11

Montana

$3,732.83

$7,241.69

Nebraska

$3,594.46

$6,973.25

Nevada

$4,263.19

$8,270.59

New Hampshire

$4,943.44

$9,590.27

New Jersey

$5,361.06

$10,400.47

New Mexico

$4,185.93

$8,120.71

New York

$4,969.84

$9,641.50

North Carolina

$4,124.04

$8,000.63

North Dakota

$3,756.19

$7,287.00

Ohio

$3,738.95

$7,253.56

Oklahoma

$4,038.90

$7,835.47

Oregon

$3,881.17

$7,529.48

Pennsylvania

$4,209.21

$8,165.86

Rhode Island

$4,376.34

$8,490.10

South Carolina

$4,187.65

$8,124.04

South Dakota

$3,608.28

$7,000.07

Tennessee

$3,903.24

$7,572.28

Texas

$4,937.00

$9,577.78

Utah

$3,775.21

$7,323.92

Vermont

$4,199.77

$8,147.56

Virginia

$5,404.32

$10,484.38

Washington

$4,568.09

$8,862.09

West Virginia

$3,381.36

$6,559.84

Wisconsin

$3,410.29

$6,615.96

Wyoming

$3,944.72

$7,652.76

 

State

Silent

Boomers

Gen X

Millennials

Gen Z

Alaska

$5,456

$9,495

$8,995

$4,464


$1,518


Alabama

$3,511

$6,461

$6,485


$3,324


$1,455




Arkansas

$3,194

$5,995

$6,197


$3,240


$1,803


Arizona

$4,149

$6,967

$6,778


$3,575


$1,555


California

$4,232

$7,050

$6,578


$3,654


$1,596


Colorado

$4,004

$7,499

$7,439


$3,833



$1,514


Connecticut

$4,091

$8,179

$8,046


$3,716



$2,567


Dist. of Columbia

$5,486

$7,976

$7,393


$4,596



$2,814


Delaware

$4,147

$7,128

$7,144


$3,285



$1,608


Florida

$4,311

$7,047

$6,615


$3,639



$1,837


Georgia

$4,356

$7,517

$6,972


$3,540


$1,835


Hawaii

$4,386

$7,073

$7,355


$4,203


$1,657


Iowa

$2,367

$5,297

$6,163


$2,857


$935


Idaho

$3,477

$6,147

$6,332


$3,193


$928


Illinois

$3,641

$7,054

$7,040


$3,537


$1,556


Indiana

$3,137

$5,998

$6,174


$3,003


$1,402


Kansas

$3,187

$6,514

$6,930


$3,292


$1,421


Kentucky

$3,044

$5,727

$6,080


$3,082


$1,372


Louisiana

$3,679

$6,598

$6,561


$3,425


$1,971


Massachusetts

$3,481

$7,017

$7,022


$3,479

$1,882


Maryland

$4,341

$7,994

$7,458


$3,671


$1,749


Maine

$3,107

$6,054

$6,531


$3,375


$1,286


Michigan

$3,436

$6,049

$6,113


$2,971


$1,523


Minnesota

$3,025

$6,299

$6,898


$3,244


$1,338


Missouri

$3,265

$6,333

$6,757


$3,279


$1,346


Mississippi

$3,218

$5,634

$5,718


$3,043


$2,011


Montana

$3,285

$5,977

$6,868


$3,385


$1,506


North Carolina

$3,481

$6,566

$6,710


$3,397


$1,486


North Dakota

$2,141

$5,362

$6,646


$3,326


$1,467


Nebraska

$2,717

$5,909

$6,498


$3,136


$1,388


New Hampshire

$3,582

$7,140

$7,443


$3,519


$1,666


New Jersey

$4,126

$8,011

$7,882


$3,928


$2,241


New Mexico

$4,373

$6,906

$6,534


$3,532


$1,207


Nevada

$4,733

$6,993

$6,357


$3,700


$1,185


New York

$3,906

$7,127

$7,234


$3,986


$2,495


Ohio

$3,313

$6,383

$6,530


$3,135


$1,465


Oklahoma

$3,484

$6,789

$6,900


$3,493


$1,641


Oregon

$3,618

$6,502

$6,481


$3,245


$856


Pennsylvania

$3,282

$6,550

$7,059

$3,457


$1,545


Rhode Island

$3,524

$7,162

$7,313


$3,371


$1,786


South Carolina

$4,019

$6,537

$6,559


$3,281

$1,375


South Dakota

$2,584

$5,710

$6,900

$3,250


$1,531


Tennessee

$3,388

$6,309

$6,505


$3,308


$1,737


Texas

$4,350

$7,591

$7,119


$3,779


$1,945


Utah

$3,364

$6,411

$6,713


$3,070


$932


Virginia

$4,132

$7,956

$7,968


$3,985

$1,692


Vermont

$3,681

$6,197

$6,547


$3,297


$2,511


Washington

$3,947

$7,365

$7,190


$3,500


$1,355


Wisconsin

$2,740

$5,673

$6,289


$2,914


$992


West Virginia

$2,914

$5,573

$6,158


$3,238


$1,166


Wyoming

$3,523

$6,356

$6,889

$3,663

$1,442

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How to Avoid Going Broke After Winning the Lottery

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

We’ve all heard the horror stories of people who play the lotto (and actually win!), only to end up broke (and substantially more miserable) just a few years later.

But some of us continue to cross our fingers when we buy a ticket, even when the odds of winning big are worse than getting killed by fireworks or being born with extra fingers and toes.

Fortunately, recent data suggests that lotto players’ hopes of life-long financial security are not entirely in vain. In a study published by the National Bureau of Economic Research tracking the trajectories of 3,362 Swedish lottery winners, researchers found that most large-sum winners still had more wealth 10 years later than they would have otherwise, and furthermore, reported greater life satisfaction.

(The National Endowment for Financial Education also recently set the record straight about the oft-cited, fictional statistic that 70% of lottery winners lose it all in less than a decade.)

Still, if you don’t want to wind up broke after winning it big, a little bit of planning might help.

Talk to professionals — and no one else.

Human beings are social animals. And if you win the lottery, chances are your first impulse is going to be to shout it from the rooftops.

But if you want to keep your money, you probably want to keep your lips zipped.

Because once your friends, family and long-estranged acquaintances hear that you’re rolling in dough, they’re all going to want a piece for themselves.

While many lottery winners do make gifts to family and friends, doing it on your own terms (and in your own time) keeps the control in your hands. If you don’t set boundaries and make a plan, things can go awry quickly — and when it comes to planning for millions or billions of dollars, you’re going to need some professional help.

You may also want to look into hiring a risk advisor who works specifically with wealthy clients, whose insurance needs differ substantially from most of society. If you get into a car accident or someone gets hurt on your property, your entire portfolio could be at risk — so you need to ensure you’ve got an appropriate amount of coverage.

Determine the payment strategy that works for you

Lottery winners have two choices when it comes to receiving their winnings: they can take a lump sum, or have the payment distributed over time in the form of an annual payment (also called an annuity).

And while there are good arguments for either option, there’s no cut-and-dry way to determine which is better for you.

Picking the lump sum

Obviously, many winners find the lump sum to be the most attractive option, because who hasn’t gabbed around the watercooler about what they’d do with a six- or seven-figure windfall? What’s more, if you invest a lump sum wisely, you might be able to earn even more cash in capital gains and appreciation.

On the other hand, it’s exactly that kind of watercooler fantasizing that could lead you to financial ruin. It’s all too easy to spend every cent of the money when it’s all suddenly in your hands.

Opting for the annuity

The annuity gives you the opportunity to spread out the payments over time and makes it much harder to squander the money all at once. And while every specific lottery program is different, annuity payouts often have an amount incentive (for instance, Powerball annuities increase 5% each year). It can be very comforting indeed to have a guaranteed source of income over the next few decades, even if it means you aren’t a millionaire right away.

Tax implications

From a tax perspective, there may be a significant difference — or there may not, depending on how much you win (and whether or not the tax rates change over time). Whether you pay the taxes all at once or each year as the annuity payments drop, a big chunk of the prize money is going to Uncle Sam, and other factors may weigh more heavily on your decision.

The best call is to sit down with your financial planner and do the math. But keep in mind that with the lump sum, you do at least know ahead of time the tax rates, whereas the annuity leaves you with more uncertainty as to how much of the prize you’ll actually receive.

Come up with a financial plan

While everyone can benefit from having a solid financial plan, it’s even more critical for those with millions or billions of dollars. When you feel like your pockets are endless, it’s easy to ignore your cashflow altogether… which is one reason so many lottery winners doend up spending it all.

While your financial advisor will walk you through the creation of a specific financial roadmap, here are some of the basic constituents.

  • Budget: Yes, you still need a budget, even if you’re a millionaire. And if you weren’t making a large income before you won, your existing budget may need substantial revamping.
  • Investing: What better job for your windfall than to be fruitful and multiply? A thoughtful investment strategy, be it for beginners or for long-time pros, can help make your prize grow over time, and a qualified financial advisor will be able to help you make smart choices. (Though keep in mind that no investment strategy is risk-free.)
  • Long-term savings strategy: Millionaires still need to plan and save for retirement if they want their wealth to carry them through the end of their lives, and they should still reserve some of their wealth as an emergency fund, as well. Although investing is a great way to grow your money, your emergency fund should be highly liquid — that is, easily accessible, perhaps stored in a high-yield savings account.
  • Charitable giving: Many high-net-worth individuals make sizable donations to existing funds, or even start their own foundations. And while charitable giving is a great way to get a tax break, the best gifts are for causes the giver is actually passionate about. (After all, most of those gifts are irrevocable, and whether it’s picking an existing fund or creating your own, there’s a substantial amount of legwork involved).

Avoid common mistakes

They’re your winnings, and you can do with them what you want. But for best results (and to maintain your millionaire status for more than a couple of years), avoid these common mistakes.

  • Splurging and impulse buys. Yes, of course, you’re going to want to buy something to celebrate. But unchecked spending can blow up your budget, no matter how big that budget may be. Before you go too crazy, ensure you have a plan in place to fund the essentials as well as the fun extras.
  • Immediately quit your job. As fun as it is to fantasize about a dramatic walk-out, you may not want to throw in the towel just yet. Even with a large sum of money, quitting your job could lead to unexpected consequences (like having to purchase health insurance through the marketplace, where your monthly premium might be hundreds or even thousands of dollars). Again: just make sure you’ve thought it all through!
  • Making financial decisions that can drain you. Malik S. Lee, CFP and founder of financial advising company Felton & Peel Wealth Management, warns prize winners against what he calls “endless decisions” — that is, purchases that have potential to cost a lot down the road. That could mean purchasing a luxury yacht or investing in an area business you’re unfamiliar with, but either way, beware of spending that begets more spending, and more after that.

The bottom line

Winning the lottery is an incredible stroke of luck — and despite the misfortune that’s befallen many lottery winners, it is possible to come out on top if you set up a solid plan. So if you see those winning numbers, go ahead and jump, dance or scream into your pillow… and then sit down, take a deep breath and get to work.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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How to Prepare Yourself for the Next Recession

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Anyone who lived through a recession knows that it can cause financial pain, no matter your level of wealth or employment status. This means that preparing for a recession is always the right move for your financial well-being.

It’s been more than 10 years since the Great Recession ended, which marked the close of the longest economic contraction since the Great Depression of the 1930s. Over the past decade, we have seen the longest economic expansion in U.S. history.

Many people wonder how much longer the current economic expansion will last and when the next recession might arrive. It’s impossible to know, so you should start to prepare for the next recession today.

How to prepare for a recession

The best way to prepare for a recession is to monitor and improve your financial health while the economic outlook remains positive. The list of things you should do to improve your finances isn’t long, and making solid financial plans isn’t a complicated formula.

“It’s the same advice you should generally always be following,” said Tendayi Kapfidze, chief economist at LendingTree, MagnifyMoney’s parent company. “The world is a risky place, and income is not always guaranteed. You should always be doing things to shore up your finances.”

8 things you can do to prepare for a recession

1. Build up your emergency fund

“The main challenge a recession creates is it could create some interruption to your income,” Kapfidze said. To protect yourself from a decline in income or a job loss, you should have enough money to pay at least three months of expenses stashed in your emergency fund — six if you have children.

Wherever you keep your emergency fund — in a savings account with a bricks-and-mortar bank, an online savings account or even a money market account — the most important thing is to keep the fund liquid. You don’t want to be forced to pull money out of the stock market during a recession.

According to Dennis Nolte, a certified financial planner who works for commission and fees in Winter Park, Fla., if you’re young and financially secure, you might consider investing part of your emergency fund in a Roth IRA. You can withdraw contributions from a Roth IRA at any time without paying tax penalties. You have to leave earned interest in the account, however, because withdrawing interest would trigger penalties.

2. Pay down debt

As a recession looms, one key strategy to protect yourself is to pay down debt. This helps to increase the amount of extra liquidity you have on hand when a recession hits.

“This is the best risk management tool,” Nolte said. He suggested that you prioritize paying off high-interest credit card debt.

In addition to directing available funds to pay off debt, consider refinancing or consolidating your debt at lower interest rates. This can reduce how much you pay in interest, decrease your monthly bills and increase the funds available for saving or paying down even more debt.

3. Review your investing strategy

It’s important not to let a looming recession dictate your investing decisions. In other words, don’t try to time the stock market. Instead, prepare for a recession by maintaining good habits at all times: Build a deliberate investing strategy, and stick with it.

“The best thing people can do now is verify that their portfolio is appropriate for them,” said Angela Dorsey, a fee-only certified financial planner based in Torrance, Calif. “If it’s too risky, you should make changes now.”

Determine that you have the right investment mix

Over the past few years, many people invested aggressively in equities as the stock market climbed higher and higher. Now, it’s time to ask yourself how you would feel if the market fell 20% in one year.

Be honest: If you believe that you can tolerate a loss of this magnitude, stick to your plan when the market falls, and stay on course. You should hold on to your investments particularly if you’re young, because time is on your side, and you’ll have lots of time to recover losses in a stock-heavy portfolio.

Dorsey recommends that you rebalance your portfolio if it strays too far from your strategic allocation, or mix of stocks, bonds and other securities.

Kapfidze agrees. “You want to have a balanced portfolio that meets your long-term goals,” he advised. That should be the goal regardless of where we are in the economic cycle.

For example, your plan might be to have 70% of your investments in stocks and 30% in bonds. The market has gone up, so a larger percentage of your portfolio now might be in stocks, say 75%. So, you should rebalance your portfolio — sell stocks and buy bonds — to reach your goal of 70% stocks and 30% bonds.

Change your strategy for peace of mind

Your portfolio should be appropriate for your risk tolerance. If you’re nervous about an economic downturn and believe that big losses in your retirement savings would keep you up at night, the time to reallocate is now.

Consider the strategy above: 70% in stocks and 30% in bonds. If you believe that you couldn’t endure a huge drop in the equity markets, now might be the time to change your allocation to, say, 50% stocks and 50% bonds. Just don’t wait for the market to tank to change it up, though.

“When you’re not emotional about it, when it’s not free falling like it did in 2008 or in 2001, 2002, you can make some adjustments,” said Scott Bishop, a fee-only certified financial planner in Houston. That’s because now “you can see if there [are] some flaws in your portfolio that might be subject to market risk by lack of diversification.”

4. Diversify your income with a side gig

When we think of diversification, we tend to focus on our investment allocation, but the idea can and should be applied to sources of income as well. Because a loss of income is one of the biggest threats during a recession, having multiple income streams can help to lessen the effect from a reduction in income or a job loss.

Millions of Americans have a side gig. If you don’t, now could be an excellent time to consider one. Do some research and identify a side gig you can pick up now to protect yourself against potential income reductions later.

5. Reduce your living expenses

Don’t wait for a recession. Now is the time to trim the fat in your spending. Review your recurring fixed monthly payments as well as your discretionary spending. See what you can eliminate, and reduce or downgrade services that aren’t vital to your household. Consider becoming conservative with your discretionary spending in favor of stocking up cash and paying down debt.

6. Assess your current job and employer

When you prepare for a recession, don’t monitor only national economic conditions: Take a closer look at circumstances close to home.

“Understand how well your employer is doing financially, because that may help you better assess your risk,” Kapfidze said. Trends in your company and your industry affect you more directly than what happens on a national level.

Employees of public businesses can stay abreast of company and industry happenings by listening to their company’s earnings calls.

In addition to knowing the state of your company, employees should find ways to insulate themselves against a potential job loss. Kapfidze suggested taking steps to increase your value to your company in your current role, such as increasing your knowledge and skills and taking on additional responsibilities.

7. Set aside cash for short-term goals

If you have money invested in the market for short-term goals, such as repairing your roof or buying a car, it’s time to shift gears. That money should be kept in an interest-bearing account, so it won’t be influenced by the stock market.

“[This] should be the case anyway,” Dorsey said. “But over the last few years, people have gotten a little too ambitious and say, ‘Oh gosh, I want to buy a house in five years, so let’s be super aggressive and put it all in stock, so it can grow.’ They can grow, but they can also go down.”

8. Don’t let fear drive your decisions

Recessions can be difficult, frightening times. A common pattern that financial planners see is that people act based on emotions and fears.

“When they are emotional, people tend to buy on greed when the market’s going high and sell on fear when the market’s going down,” Bishop said. “If you’re buying high and selling low, you’re doing exactly the opposite of what you need to do to make money in the market.”

A recession is a normal part of economic life. With your retirement savings, you have to keep a long-term perspective, because another economic expansion will arrive after a recession ends.

The bottom line: Don’t panic or allow your emotions to get in the way when the next recession hits. Instead, prepare for it now, and you’ll breathe easy later.

Recession FAQs

A recession is when the economy contracts, or gets smaller, for an extended period. Recessions are part of the economic cycle, and they’re followed by a period of economic expansion.

One marker of a recession is six consecutive months of negative gross domestic product (GDP). GDP measures the market value of all goods and services produced by the U.S. economy. However, six months of negative GDP isn’t the only determining factor for a recession.

The National Bureau of Economic Research (NBER), which designates recessions, also looks at real income, employment, industrial production and wholesale-retail sales.

Since 1945, recessions lasted 11 months on average. However, they can extend significantly longer. The Great Recession, for instance, lasted 18 months. History shows that the United States experiences a recession roughly every six years.

Although recent recessions last 11 months on average, consumers and businesses feel a recession’s effects for years or even decades afterward. Long-term unemployment or reduced wages can affect individuals and families in multiple ways.

For example, if a family no longer can afford to send their kids to college because of a job loss or depleted savings, the missed educational opportunity for that child can affect their earning potential and their future family.

In the last recession, many people lost their home to foreclosure, a blow to their personal finances that can take years to recover from. Long-term unemployment not only has a financial effect, but also an emotional one as well.

Plus, reduced earnings mean reduced buying and fewer dollars rotating in our economy, which results in further lost opportunities for consumers and businesses alike.

Trying to time a recession isn’t something the average person should try to do, Kapfidze said. “Professionals try to do that, and they lose money every day.”

Nevertheless, a recession can provide an excellent opportunity to buy assets at “discounted” prices. Kapfidze suggested waiting until the economy shows signs of recovery before you take the plunge, because trying to predict the bottom of the market also is risky.

“Don’t try to catch a falling knife, because you might grab it by the blade instead of the handle,” he warned.

“There are various things you can look at to assess the risk of recession,” Kapfidze said. One is the yield curve, which measures the difference between long-term and short-term interest rates. A lot of discussion about the risk of a recession in 2019 centered on the yield curve, but that chatter has died down.

“[That] doesn’t mean the recession risk is materially lower,” Kapfidze explained. “It’s probably a bit lower, but it could still happen within six to 18 months. That’s a pretty wide window.” Of course, there’s no guarantee that a recession will happen in that time frame. “Recently, the economy has looked a little bit better than it did a few months ago.”

Things can change rapidly. Earlier this year, the sentiment was negative, Kapfidze pointed out. “It can turn positive pretty quickly, and it can turn a little more negative pretty quickly.”

Again, Kapfidze stressed that instead of focusing on the timing of the next recession, consumers should take prudent steps to firm up their finances. “That increases the odds of success and certainly is way less stressful than trying to figure out where I am in the business cycle and what are the odds of a recession.”

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Alaya Linton
Alaya Linton |

Alaya Linton is a writer at MagnifyMoney. You can email Alaya here