Money Management

A recession could be in the cards. Here’s my strategy for being prepared. 

Financial experts have been sounding recession warnings since mid-2022. And at this point, it’s fair to assume that economic conditions have the potential to deteriorate in 2023. In fact, the Federal Reserve itself has told consumers to expect a recession later this year.

That’s clearly an unsettling thought. But there are steps you can take to prepare.

For one thing, you can shore up your savings account balance. Adding money to your emergency fund could make it easier to cope with a recession if you end up losing your job.

It’s also a good idea to make sure your brokerage account is set up for a recession. Here are some steps I’m taking to make sure mine fits that bill.

1. I’m making sure I’m well-diversified

Last year, my portfolio’s value dropped when the tech sector took a major hit. That’s because I was pretty heavily invested in tech stocks, perhaps too much so.

I want to avoid a repeat situation in the event of a recession. So I’m checking my portfolio to make sure it contains a broad mix of stocks. If I see that I’m low on stocks from a particular market sector, I’ll seek to add those.

2. I’m checking to see if my investments are well-balanced

A big reason last year’s tech plunge caught me off guard is that I didn’t realize quite how much of my portfolio was invested in that sector. See, I didn’t start out by loading up on tech stocks. Tech was only one sector of many I was invested in. But through the years, the value of my tech stocks outpaced the growth I saw with most of my other investments. That led to a major imbalance in my portfolio.

I’ve already taken some steps to address that. But I’ll be continuing to monitor my portfolio to make sure it’s as balanced as I want it to be. If I go into a recession too heavily invested in tech, and that sector gets hammered again, it won’t be pretty.

3. I’m transferring in extra cash

It’s easy to look at a recession as a negative event. But from an investing perspective, it has the potential to be a positive one. If stock values plunge during a recession, you get the opportunity to scoop up shares on sale.

That’s something I’d like to take advantage of. And so I’ll be putting extra cash into my brokerage account so the money is there if an opportunity arises.

I’m able to do this because I’m confident that I have a fully loaded emergency fund. If you don’t, it’s better to put your extra money into savings. But because I’m set in that regard, these days, my extra money can sit there waiting to be invested.

Most people would rather not deal with a recession. But the idea of one doesn’t have to be so daunting if you go in prepared. And I recommend making these moves in your portfolio to ensure it’s recession-ready.

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Saving money is a good thing, but some efforts to keep more cash in your bank account can backfire. Here are four frugal habits I no longer indulge in. 

Keeping more money in your checking account can really help your finances, so it can pay to implement some money-saving moves. For example, habits like steering clear of high-interest credit card debt and avoiding splurge purchases can help you use your money more wisely.

But, while there are frugal habits worth implementing, not every money-saving move makes sense in every situation or for every person. In fact, there are four techniques I used to implement that I’ve since abandoned. Here’s what they are and why I no longer practice them.

1. Buying groceries with coupons

One of the biggest things I’ve given up is obsessing about using coupons for as many purchases as possible.

For many years I was an extreme couponer, which meant I collected tons of coupons, spent time poring over sales flyers, and always paid with a big handful of coupons that helped me pay pennies on the dollar for food and personal care items.

Ultimately, though, I decided the time spent couponing was not worth the savings, and I also realized I wasn’t eating the way I wanted or buying the products that really felt right for me since I was so focused on finding bargains.

Instead of using coupons at the grocery store, I now keep my bills reasonable by shopping local, participating in community-sponsored agriculture, and using a cash back credit card that provides bonus points for grocery purchases.

2. Living on a detailed budget

Living on a detailed budget is another thing I gave up on. I used to budget every dollar, but this ended up taking too long and was frustrating because I always felt I was depriving myself.

Instead of doing this, I’ve made sure to keep my fixed costs to 50% of my income and I’ve automated my savings so 20% of my money comes out of each paycheck and goes directly into savings or investment accounts.

Since I’ve automated the process of paying bills and investing for my future, I know anything that’s left in my checking account is there for me to spend on whatever I want. I spend it guilt-free without pre-planning where it will go, since I’ve already taken care of the big things.

3. Chasing the best savings account rate

I no longer switch savings accounts to get the very best rate possible. This became a huge hassle that was time consuming and left me with several open savings accounts I was no longer using. And, it just wasn’t worth it.

I only keep the bare minimum in a savings account that I will need for emergencies or short-term purchases, so with the low amount of money I have in savings, a small difference in interest rates really doesn’t make a big impact.

Rather than dealing with the process of opening and closing accounts, I’ve found a high-yield savings account with a consistent track record of paying a generous rate and I just leave my money there. It’s a lot less stress, and I know that earning an extra percent or two on a small sum isn’t where I should focus my energy.

4. Driving out of the way for cheaper gas

Finally, I’ve given up driving out of the way to reduce the cost of gas. By doing so, I would usually end up negating most of the savings from the lower prices at the pump as a result of the extra driving. The time wasted also cost me, as it was time I couldn’t work.

Ultimately, it’s important to realize not every frugal habit is worth it. Take the time to think about what really works for you in terms of saving money and focus on those big wins instead of trying to force yourself to adopt habits that don’t make sense for your situation.

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Inflation has been surging for two years now. Read on to see why refinance activity may be playing a role in that. 

When mortgage rates plunged to record lows in 2020, many homeowners were quick to refinance their mortgages. Some opted for a traditional refinance. But many borrowers went with a cash-out refinance instead.

A cash-out refinance allows borrowers to take cash out of their home by tapping existing equity. Someone with a home worth $500,000 and a mortgage balance of $250,000 might, for example, do a cash-out refinance where they borrow $300,000. The first $250,000 in that case is used to pay off the existing mortgage, and the remaining $50,000 can be taken as cash and used for any purpose.

During the fourth quarter of 2020, 38% of mortgage refinancers did a cash-out refinance, says Freddie Mac. And the share of refinance mortgages that were of the cash-out variety increased to 42% in 2021, when mortgage rates were still quite low.

Not surprisingly, these days, a cash-out refinance is a less attractive option given where mortgage rates are at. But all of the cash-out refinances that happened in 2020 and 2021 may have helped contribute to the higher levels of inflation consumers have been grappling with since mid-2021.

How cash-out refinances tie into inflation

The rampant inflation we’ve been experiencing has really boiled down to supply and demand. Consumers were flush with cash from stimulus aid in 2020 and 2021, and many increased their spending at a time when supply chains were suffering. That supply-demand disconnect allowed consumer prices to soar.

Meanwhile, supply chains opened up in 2022, and bottlenecks have since continued to improve. Throw in the fact that there’s been no federal stimulus aid to come through since March 2021, and you’d think inflation would’ve cooled more by now. But a big reason why inflation has remained high could be a matter of homeowners sitting on excess cash from the refinances they did in 2020 and 2021.

Those who took cash out of their homes when the opportunity was there may be continuing to spend it to this day. And let’s also remember that home values soared in 2021 as buyer demand increased due to low mortgage rates. So those going the cash-out refinance route may have been able to score a lot of spendable cash in the process.

An ongoing problem

Although inflation has cooled since peaking in 2022, we’re nowhere close to the ideal 2% inflation mark the Federal Reserve likes to target. In April, the Consumer Price Index (CPI) had annual inflation measured at 4.9%. That’s better than the 9.1% CPI reading we saw in June 2022. But clearly, it’s not a complete improvement, either.

In time, inflation levels should taper off. And the Federal Reserve will no doubt do what it needs to do to make that happen, even if it means raising interest rates yet again. But it may take a while to get to a place of more moderate inflation, at least partly due to homeowners having cash at their disposal from refinance activity a few years back.

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I could’ve gotten a cake at the local bakery. Read on to find out why I opted for Sam’s Club instead. 

When my son turned 3 years old, he really wanted a dinosaur cake to celebrate. I wanted to comply and make his dream for this big event come true, but when I reached out to my local bakery about making a custom dinosaur cake, the prices were absolutely outrageous.

The bakery wanted over $250 for a cake, which seemed absolutely absurd for a child’s birthday treat that would be devoured in moments.

I was definitely not going to pull so much money out of my checking account for a cake, but I didn’t want to disappoint my son. Fortunately, Sam’s Club came to the rescue.

Here’s why I opted for a Sam’s Club cake

Sam’s Club offered me a much more affordable option. I was able to get a 1/4 sheet cake that serves 24 people for the bargain price of just $19.89 — a fraction of what the bakery wanted to charge me.

Sam’s Club had a Jurassic World cake that wasn’t exactly what I was looking for, but it had some detailing that I knew could make work to serve as the base of my son’s dream cake. I was able to get the Sam’s Club cake and then purchase some dinosaur figurines from Dollar Tree as well as some fondant toppers from Etsy.

With the Sam’s Club cake as the jumping-off point, I added my own detailing and dinosaurs to make a truly amazing masterpiece cake that I knew would exceed my son’s expectations. And I was right — my cake ended up looking as good or better than what the bakery would have provided. And since I used real dino figures on the top to set the scene, my son has some toys that he got to keep and still plays with (once we had wiped the icing off).

The Sam’s Club cake was also moist and delicious, so it was a big hit with the party guests. And, I was able to pick it up that morning since Sam’s Club was open early in the morning on a weekend, while the expensive local bakery would have required me to pick it up the night before.

Big-box stores provide a great opportunity to save on more items than you’d think

After adding my toppers and paying Sam’s Club for the sheet cake, I ended up spending less than $30 on a cake that was a huge hit — and I had charged about $220 less on my credit card than I otherwise would have.

This is just one of many examples of how warehouse clubs can provide savings to members on things you might not expect. While it may require a little more creativity to make it work, if you’re throwing a big party — or even a wedding — why not consider whether a Sam’s Club cake could work for you, instead of a much costlier custom-made pastry from a bakery that charges a big premium?

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool has a disclosure policy.

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Fighting multiple offers for a property has become the status quo. This tool could help you score the winning bid. 

When you’re house shopping in a buyer’s market, the list price on a house can often be the top of what the purchase price will hit. But the current property shortage means it is very much a seller’s market. In a seller’s market, the list price on the house is generally the minimum you can expect to pay.

More than 3 in 4 houses wind up with multiple offers, and at least a quarter will have four or more offers. (In my personal experience the last few months, nearly every house in decent shape had multiple offers within days of being listed.)

In multiple offer situations, it’s common to have a deadline for everyone to submit their best and highest offer. Then, the seller frequently (though not always) chooses the highest offer. This is a good process for the seller — but it is very harrowing for the buyers.

Going into a best-and-last deadline

There’s a fine balance you need to walk when you’re putting in a bid on a house with multiple offers. You obviously don’t want to go too low, because then you’ll likely lose the property. And this would sting twice as much if you were willing to pay more but just didn’t offer high enough.

But you also don’t want to go too high, either. For one thing, who wants to feel as if they could have paid less for something? Then there’s the actual value of what you’re buying. You don’t want to pay more for the property than it’s worth compared to the real market, especially if you’re getting a mortgage loan.

Most lenders will have a clause that states the property must appraise at, or over, the purchase price. Even if your offer gets accepted, you’ll still lose out on the house if you lose your financing.

Utilizing an escalation clause to avoid overbidding

An escalation clause is a tool you can use to better navigate in multiple-offer situations where there’s a deadline for final offers.

Essentially, you generate an automatic bidding war by providing both your starting offer, as well as your highest offer. If there is another offer that beats your starting offer, your offer is automatically raised, in set increments ($1,000 or $2,000 is most common), until you either have the top offer, or you’ve met your offer cap.

Escalation of your offer price only happens if there is a legitimate offer higher than your own, so you don’t need to worry about overbidding for something you could have won sooner.

An example of an escalation clause

Say a house is listed at $200,000, and there are multiple offers. You can assume it will go for higher than list price, but you don’t think it’s worth more than $220,000. You want to use an escalation clause with a starting offer price of $210,000, a maximum offer price of $220,000, and an increment of $1,000.

If no other buyer offers $210,000 or higher, your offer stays at that price. But if someone else bids more than $210,000 and less than $220,000, your offer will automatically outbid them by $1,000. For instance, if someone else offers $214,000, your offer would automatically increase to $215,000. At no time will your offer rise above $220,000.

Thanks to the escalation clause, you didn’t lose out on the house because of $5,000 you were willing to pay. You also didn’t pay $5,000 more than you would have needed to pay to win the bid.

Set your offer limits carefully

While using an escalation clause can have its benefits, you still need to be wary of the usual multi-offer mind eraser. (That’s the thing that makes you go way over your budget because you’re letting FOMO fog your math skills.) Set a maximum offer amount that is rational, based on how much house you can afford — as well as what the property is really worth.

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If you’re a small business owner and don’t carry liability insurance, you’re taking a risk. Keep reading to learn why coverage is so important. 

As a small business owner, you’ve learned to keep many plates spinning simultaneously. After all, it often comes down to you to get things done. If you haven’t yet, one of the things you might want to tackle is buying liability insurance. Before you say no, read through this article to learn why you might need it.

Does this describe you and your small business?

According to the Insurance Journal, 90% of small business owners aren’t quite sure if their business is adequately insured. Nearly 30% of business owners say they don’t have any coverage at all, and 51% admit their business is not prepared to face potential risks. Finally, 53% of small business owners say their most significant barrier to buying insurance is this: They don’t know which types they need.

Whether your business is in-home or you have a dedicated building, take a look at these scenarios. If any apply to you, you should be carrying liability insurance.

1. You interact face-to-face with clients

No matter where you interact with a client, there’s the possibility that injury could occur. It may be something as simple as a slip and fall or as unexpected as a customer picking a piece of candy from a bowl on your desk and choking on it. In either case, coverage can protect you from financial peril.

2. You sometimes visit a customer’s property

If your small business takes you to a customer’s home or job site, general liability insurance could help you repair or replace anything accidentally damaged. Let’s say you’re replacing a window at a customer’s home. Your ladder slips, and another window breaks. General liability has you covered.

3. You have another person working for you

If you employ another person to work in your small business (even part time), you open yourself up to potential legal issues. For example, if an employee regularly fails to show up for work or makes costly mistakes and you fire them, they could come back with a lawsuit. The suit may accuse you of anything, from sexual harassment to wrongful termination. If you are sued, employment practices liability insurance can help you pay the legal fees and avoid cleaning out your business checking account.

4. You use advertising to promote your business

As original as you may feel your advertising to be, the adage “there’s nothing new under the sun” is true. There’s little chance of using words or phrases no other company has ever used before. When you get into trouble is when a phrase has been copyrighted or trademarked.

If you use copyrighted or trademarked wording, even accidentally, the copyright or trademark owner can sue you. General liability insurance can help you pay court costs.

5. You want to bid on jobs that require liability insurance

If you’re growing your business, you undoubtedly know that some jobs require you to bid on them, and those jobs typically require you to carry liability insurance.

Let’s say you own a landscaping business. It never felt “big” enough to insure, and you’ve worried about the cost of liability insurance. Now, you’ve heard that your city is looking for a new landscaping company to take care of the greenspaces downtown. The job would change everything, from how much money you’ll earn to how many people you can afford to hire.

The time to secure liability insurance is before you need to win a job. Ideally, everything will be in place before bidding begins.

6. Your product could cause injury

If your business involves selling a product, think of any way that product could hurt a person. For example, could someone cut themselves on the item? Is it possible for a child to swallow a small part? Could it catch on fire?

Injury and death sometimes occur in strange ways. For example, in 2011, a 34-year-old woman died after a night out dancing. It wasn’t the dancing that killed her. A pathologist determined that she was likely killed due to a reaction to the glue used to apply her hair extensions.

In 1941, American novelist Sherwood Anderson died while on a South American cruise. While eating the olive out of his martini, it’s believed that Anderson swallowed a toothpick sliver. As the fragment worked through his system, it damaged organs, causing Anderson’s death.

No matter what product you sell, imagine the worst that can happen.

7. You bill clients

Let’s say you normally trust your accounting software, but make a mistake on a customer’s financial statement. If, at tax time, the customer must pay a penalty due to that mistake, they can sue your business. Professional liability insurance will help you cover the legal costs, leaving you with more money to take care of business.

The three most common types of liability insurance for small businesses like yours are:

General liabilityProfessional liabilityEmployer liability

If you’re holding off because you’re afraid of how much insurance coverage may cost, call an insurance agent who deals with business policies. You may be surprised by how little peace of mind costs.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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