In his most somber appraisal of the U.S. economy yet, Ben Bernanke, Chairman of the Federal Reserve, acknowledged on April 2 that we could be headed towards a recession. Bernanke admitted that the country’s gross national product is not likely to grow during the first half of 2008, and that it is “a very difficult period” for the economy.
“Recession is possible,” Bernanke told the Joint Economic Committee. “Our estimates are that we are slightly growing at the moment, but we think that there's a chance that for the first half as a whole, there might be a slight contraction.” When the nation’s economy slows down, it can be reflected in a number of ways, including a sagging stock market, higher unemployment rates and less overall consumption of goods and services. Technically, an economic downturn is only considered a recession when these conditions last for more than six months.
A recession is not something to freak out about. The economy is usually cyclical. “It’s the normal course of things, we’ve had six years of un-growth and businesses run in cycles,” says Christopher Brown, president of Ivy League Financial Advisors based in Rockville, Md. “You’re not going to have [the economy of] 1990 to1999 forever.” So what should you do to get ready? “Preparing for a recession is much like preparing for a heart attack,” says Charles Failla, a Certified Financial Planner and Principal with Sovereign Financial. “You don't want to wait until you feel chest pains to take action." Here is the best way to make sure your financial life is in order no matter what the next months bring to the economy:
Set up an emergency fund:
- “Evaluate how secure your job is and if there is a chance you might loose it, focus on how much is in your cash reserves or emergency fund,” says Brown. The general rule of thumb is to put away three to six months of your salary. Start looking at your expenses now so you can best estimate what it will take to create the right cushion.