During a recession, if you’re paying more than the minimum needed payments on your loans, you can quickly free up cash flow by lowering that payment to the minimum.
What impact does a recession have on debt?
Over the last six decades, global government debt has risen following each global recession. There were four global recessions between 1960 and 2019: 1975, 1982, 1991, and 2009. Over the five years after these worldwide recessions, global government debt increased by 4-15 percentage points of GDPby 4 percentage points of GDP in 1975-80, 15 percentage points in 1982-87, 9 percentage points in 1991-96, and 4 percentage points in 2009-14. (Figure 1).
In the majority of countries, government debt tends to rise after recessions. Two-thirds of countries had the same or higher debt levels five years following a global recession, on average. After recessions, advanced economies had a somewhat higher share of debt than emerging market and developing economies (EMDEs), while about three-quarters of low-income countries (LICs) had higher debt.
Every global recession has resulted in a constant increase in advanced economy debt in the five years following the event, with increases ranging from 3 to 14 percentage points prior to 2020. (Figure 2). The debt of advanced economies has increased by more than 10% of GDP in each of the last three recessions.
The evolution of government debt in EMDEs, on the other hand, has been more irregular (Figure 3). In the five years following the 1991 and 2009 recessions, government debt in EMDEs excluding China decreased little. Debt increased in the immediate aftermath of the 1991 recession, but quickly declined as recovery returned. While government debt increased slightly during the 2009 recession, it then steadied, since EMDEs were less hit by the global financial crisis and recovered more quickly than advanced nations.
In a recession, what happens to loans?
You may opt for an adjustable-rate mortgage while purchasing a home (ARM). In some circumstances, this is a wise decision (as long as interest rates are low, the monthly payment will stay low as well). Early in a recession, interest rates tend to decline, then climb as the economy recovers. This indicates that an adjustable rate loan taken out during a downturn is more likely to increase once the downturn is over.
Should you pay down debt during a downturn?
Paying off debt, especially high-rate credit card debt that accrues interest quickly, may be a good choice during a recession. However, it is contingent on your general financial well-being and employment security.
Is paying off debt beneficial to the economy?
Issuing Debt With Bonds To borrow money, governments frequently issue bonds. This allows them to avoid raising taxes and provides funds for spending while simultaneously stimulating the economy through government spending, theoretically creating additional tax revenue from successful enterprises and taxpayers.
Is debt repayment beneficial to the economy?
If you’ve already spent your stimulus money, there’s some good news: you might be eligible for a second payout. A few alternative ideas have been put forward.
Among the features of the HEROES Act is a one-time $1,200 stimulus payment per qualifying adult and kid, up to a maximum of three dependents per family. This means that a married couple with three children filing jointly may get $6,000 under this approach.
Meanwhile, the Emergency Money for the People Act, which was proposed before the HEROES Act, proposes a monthly stimulus payment of $2,000 for single filers and $4,000 for married couples filing jointly, plus an additional $500 per child for up to three children per family. These payments would be subject to the same income thresholds as the first round of stimulus checks, meaning that higher incomes might not get all, or any, of it. Those payments, on the other hand, might be made for up to a year.
Of course, neither bill has been passed, and Republicans have opposed both Democratic-sponsored bills. The truth is that neither proposal is likely to pass without changes. But, ideally, both parties will be able to put politics aside in order to bring some financial help to Americans who are in desperate need. And if you do obtain that money, paying off debt with it is an excellent thing.
If you are laid off in the future months, the less money you owe each month, the less serious your situation will be. And if you can stop wasting money on interest, you’ll have more money to invest back into the economy when the time comes.
Keep in mind, though, that a second stimulus check may not arrive for some time. Meanwhile, if you have any money left over from your initial check, try to stretch it as much as possible. If you only need money to pay for necessities, don’t use it to pay off debt. Though using any windfall to pay off debt is a good idea, your first goal should always be to meet your immediate requirements before using any additional money to pay off debt.
Should you keep cash in a downturn?
- You have a sizable emergency fund. Always try to save enough money to cover three to six months’ worth of living expenditures, with the latter end of that range being preferable. If you happen to be there and have any spare cash, feel free to invest it. If not, make sure to set aside money for an emergency fund first.
- You intend to leave your portfolio alone for at least seven years. It’s not for the faint of heart to invest during a downturn. You might think you’re getting a good deal when you buy, only to see your portfolio value drop a few days later. Taking a long-term strategy to investing is the greatest way to avoid losses and come out ahead during a recession. Allow at least seven years for your money to grow.
- You’re not going to monitor your portfolio on a regular basis. When the economy is terrible and the stock market is volatile, you may feel compelled to check your brokerage account every day to see how your portfolio is doing. But you can’t do that if you’re planning to invest during a recession. The more you monitor your investments, the more likely you are to become concerned. When you’re panicked, you’re more likely to make hasty decisions, such as dumping underperforming investments, which forces you to lock in losses.
Investing during a recession can be a terrific idea but only if you’re in a solid enough financial situation and have the correct attitude and approach. You should never put your short-term financial security at risk for the sake of long-term prosperity. It’s important to remember that if you’re in a financial bind, there’s no guilt in passing up opportunities. Instead, concentrate on paying your bills and maintaining your physical and mental well-being. You can always increase your investments later in life, if your career is more stable, your earnings are consistent, and your mind is at ease in general.
In a downturn, where should I place my money?
Federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds are among the options to examine.
Is it better to save or pay off debt during a recession?
Many Americans are taking a deeper look at their financial health particularly their emergency funds as we recover and seek stability in an uncertain post-COVID-19 environment. According to a recent survey by Regions Bank*, a quarter of Americans would have trouble meeting one month’s bills with their present funds.
If you’ve recently received a large sum of money, such as a bonus, tax refund, or stimulus check, you may be debating whether to put it toward debt or store it for a rainy day. During times of economic uncertainty, it’s critical to think about a few things before determining how to spend extra money.
Should I pay off debt or save?
Putting additional money toward paying down high-interest debt has long been basic financial advice. The logic behind this is sound: paying down high-interest debt will save you money in the long term by lowering the overall interest you pay. While this is still sound advice, it’s a good idea to examine how safe your finances are before adding to existing debt during times of economic turmoil.
Is your ability to cover your expenses at risk?
If you answered “yes” or even “maybe,” instead of actively paying off debt, you should try to save as much money as you can in an emergency fund. Make minimum payments on your balances on schedule to keep your credit score from suffering and to keep cash on hand. If the worst happens and you lose your job, the money you’ve set up can help you cover your bills until you can get back on your feet. You might find yourself unable to pay some obligations if you don’t have that buffer, which could lead to you falling deeper into debt.
Are you currently financially stable?
Using extra cash to pay down high-interest debt is still a good option if you are lucky enough to be financially secure and have emergency funds in place. Even if your financial situation is less solid, there may be ways to manage debt while saving what you can. You could, for example, set aside half of your tax refund or stimulus check and use the rest to pay off debt.
Other tactics for reducing high-interest debt
If your credit is in good standing, you may be able to find other ways to pay off high-interest debt. Examine the interest rates on your debts to discover if there are any ways to save money. Transferring your credit card balance to a card with a reduced interest rate is one possibility. Alternatively, you might use debt consolidation to assist you get a lower interest rate and cut your monthly payments. Before you make a selection, plug the amounts into our balance transfer calculator or debt consolidation calculator to see which option is best for you.
At the end of the day, everyone should have an emergency fund. While paying off debt may appear to be a prudent plan when your financial situation is uncertain, it may be wiser to keep some of that cash on hand. And, in the best-case scenario, you’ll be able to use those funds to pay down debt even if you don’t have to dig into them.
Visit Regions Next Step for advice, calculators, worksheets, and educational tools to help you make better financial decisions.
*The questions in the Financially Fit Family omnibus survey were part of a national online poll that ran from April 1 to 5, 2020. It polled N=2,000 adults in the United States, and the results are weighted and representative of all adults in the United States (aged 18 and up).