Twenty-seven year-old Alexander Avgerinos is battening down the hatches for a recession.
In the second half of 2022, the western North Carolina restaurant cook forecasts a raucous recession as he readies for the worst economic downturn the new year has in store. As told by Barron’s, Avgerinos is in the process of cutting all possible expenses including streaming services, limiting his air conditioning to night time, and sharpening his at-home cooking skills in place of dining out.
It’s not that Alexander’s financial health has worsened. He’s just taking into consideration the cause of inflation in a number of areas including higher costs at the gas pump, the lasting effects of the stubborn supply chain bottleneck, or the exacerbation of labor shortages mixed with surging consumer demand. Any or all of the above encouraged Alexander to “bunker down.”
Avgerinos is hardly the only one to start reigning in spending and adjusting financial behaviors amid widespread fears of an omnipresent recession, even as the unemployment rate stands at near record-lows and consumers remain irrepressibly resilient.
Specter of recessions past haunts already weary consumers
Even so, not a cable news segment goes by without adding a cognitive stress test to the consumer psyche regarding the uncertain market outlook for 2023. Compounding issues remain prevalent; persistent inflationary concerns, continued interest rate increases, supply chain distress, recent cryptocurrency losses, or the ripple effects from the war in Ukraine. Credit union members don’t need binoculars to see potential market volatility on the horizon.
According to a probability model run in late September by the Ned David Research Group, a leading independent research firm, there is currently a 98.1 percent chance of a global recession. The only other times that recession model was that high has been during severe economic downturns, most recently in 2020 and during the Great Recession in 2008 and 2009. “This indicates that the risk of a severe global recession is rising for some time in 2023,” NDR economists wrote in their September report.
Even with this broiling concoction of uncertainty, to some, predictions still remain murky as to whether an actual recession is in the cards. Economic unpredictability often causes consumer behavior to act fitfully, cultivating a turbulent cycle that could culminate in the very recession consumers and various government agencies are desperate to stave off. In fact, Nobel Prize-winning economist Richard Thaler says he doesn’t see “anything that resembles” a recession in the United States right now due to near record-low unemployment, high job vacancies, and the fact that the economy is actually growing, albeit not as fast as consumer prices.
It is natural to get nervous about pending economic uncertainties, but to stray away from the basic fundamentals and tried-and-true tactics is alarmist and financially unhealthy. Credit unions are perfectly positioned to offer members the financial mentorship and guidance they’re looking for. Remember, consumers may still be in the recovery process from the COVID-19 pandemic, be it from a job loss or furlough, shuttering of their small business, or other consequence. They need that stabilizing and dependable presence to remind them where they are, what options are available to them, and avenues they can take to improve their financial position.
Credit unions’ inherent benefits help soothe members’ economic anxieties
Consumers’ economic stresses that have defined the last three years have manufactured an environment where prospective members find themselves particularly receptive to the credit union movement’s myriad benefits compared to the big banks. Provided the reservations big banks and major financial institutions are facing externally in addition to their contractions shown during the COVID pandemic, credit unions have a great opportunity to generate goodwill by stressing their cooperative natures, competitive interest rates, and one-on-one, personalized approach.
That last point is especially poignant, as drawing attention to cooperatives’ community-oriented support and personalized touch can only enhance their collective reputation and credibility. By working with their members, emphasizing one-on-one relationships, personalized guidance, advice, and mentorship, credit unions immediately radiate that air of stability, competence, community, trust, and loyalty few banking institutions can offer or reach.
Creating a solid plan for financial stability before a potential recession
There are fundamental steps your members can take to improve their financial inclusion and health goals in order to stem the effects of a potential recession. It all comes down to working with them to create a concrete, reliable, and stable plan, writing it down, and executing on that plan. CNBC details four steps below:
Cancel the expenses that no longer serve your member
Have they considered the “possessions,” products, or services they have built around themselves that are dragging them down? Start by speaking with them about their non-essential discretionary spending and determining what areas they can cut back.
Considering the financial state in which your members find themselves, is HBO’s House of Dragons THAT important to your member? Streaming services and monthly print or digital magazine subscription fees can seriously add up. Are they a positive contribution to the short- and long-term financial health goals they’re shooting for? There’s nothing wrong with suggesting they give up or cut down on their daily or weekly “going out” budgets with friends. Perhaps your members can refrain from dining out by working on those at-home cooking recipes, just as Alexander is doing.
Coordinate with your credit union member and take a good, hard look at what items are excess and where they can save more money to pack away in an emergency account, investment accounts, or savings.
Emergency funds are never needed until they’re needed
There are many uncertainties when the economy dips into recession, and in a worst-case scenario, that could mean a job loss, furlough (as during COVID), or an unexpected medical expense at the absolute worst time.
Consistently setting a percentage of your member’s monthly income aside in case of emergency can help buffer those moments in life when things fail to go their way. “As a general rule of thumb, you should have at least three to six months living expenses that you can easily access,” says Mass Mutual’s head of insurance, Amanda Wallace.
Members need to know their emergency funds must be kept separate from the market and in an account they can quickly access when life hits the fan, like a money market or high-yield savings account. “This can help weather the storm without having to tap into retirement assets or using high-interest rate credit cards or loans,” Wallace follows.
Again, life’s emergencies give little to no warning, and at some of the worst times. Members need to be made aware how and where they can access fast, reliable, and affordable digital small dollar loans like the QCash CUSO platform on behalf of their local credit union. By partnering with QCash, your credit union will provide astonishingly efficient small dollar lending options; lightning-fast AI relational-decisioning systems that employ a 360-degree member evaluation that, if loan-approved, results in the fund’s deposit in just 60 seconds, from application to deposit.
From the cell phone your members are taking out of their pockets to near-immediate loan deposit in their bank accounts, the seamless AI-powered fintech like the QCash CUSO will transform your cooperative’s operations while showing your community you’re always looking out for the best, most efficient, and effective digital financial tools that will enhance their experience with you.
Pay off that stubborn debt
You have worked with your members to establish their emergency fund accounts. That’s great! Now that’s done and you’ve gone through their budget with them, they can take those extra dollars and pay down outstanding balances like their high-interest credit cards.
Paying off credit cards should generally occur following the creation of the emergency fund because of what the extra cash relief can offer in a recession. Everyone’s situation varies, of course, and other priorities may have to be considered.
Remember, the Fed’s interest rate hikes will raise the cost of unpaid credit card balances even higher. If you currently sport good credit, suggest that your member ask their credit card company for a lower interest rate. They might just grant that request!
Stay the course and reexamine your investment portfolios
While murmurings of unfortunate economic forces like a recession can make your members freak out a little, reinforce the fact that they have an investment plan for a reason.
Temper their worries about scary headlines, and remember that remaining invested is nearly always the best response. Historically speaking, investors who hold onto their investments through recessions see their portfolios completely recover, while individuals who don’t invest in the market at all lose out.
“You should not stop investing in your 401(k) or any other type of plan that helps you prepare for retirement,” says Wallace.
It’s also a good idea to advise your members to take a look at their various regular investments and 401(k) deposits and ensure they’re not taking on more risk than they intended. Additionally, it’s never a bad thing to keep consistent communication open with one’s spouse or loved one to ensure their investment strategies remain aligned and on course for a healthy retirement.
If your credit union is interested in upgrading its digital small dollar lending program, do not hesitate to connect with QCash CUSO or view our demo. We will be happy to have one of our friendly sales representatives work with you to onboard an effective and fast digital lending asset to your credit union. For more news and info on QCash CUSO and the credit union lending industry, feel free to follow us on LinkedIn and Twitter!