As rumors of recession persist, Fortune reported recent data reveals consumers are using credit cards to supplement their standard of living amid rising costs. Moreover, according to the report, U.S. consumer credit card balances were up 7% in the fourth quarter of 2022, with Morgan Stanley estimating Americans are poised to spend an additional $500 million of their remaining pandemic savings this year1. Among those reportedly preparing for a recession, some 41% of adults, according to CNBC, less than half (44%) are saving more money or building emergency funds. That means only about roughly 20-ish percent of adult consumers are prioritizing saving amid recession fears2. With the recent collapse of Silicon Valley Bank (SVB) creating fresh new market anxiety, the time for the other 80% of us to get organized financially has arrived.
The first step to becoming financially organized is, of course, to determine how much money is coming into your household and how much is going out. Last year, MICPA Financial Literacy Task Force member Rick David, CPA, shared strategies for finding savings in day-to-day expenditures. Determining if your monthly expenditures can be reduced by switching providers for insurance, cable, phone and other services is a great place to start refining your monthly budget to increase savings toward an emergency fund.
The next tip might seem intuitive, but following through can be difficult as so many have become reliant on credit to sustain a certain standard of living. However, stopping the use of credit cards to supplement household spending is about more than interest rates. According to Ramsey Solutions, using credit cards to pay for everyday expenses, even when paying them off at the end of the month, reduces the trackability of potentially bad spending habits by combining all of it into one lump sum amount3. Consumers need to have awareness of their spending habits to curb them in times of uncertainty, and credits cards are a great way to circumvent that awareness. Therefore, income included within a given budget should only be counted if it is accessible cash.
Finally, in the spirit of cutting back, it is important to focus extra cash on hand into paying off existing debts, particularly those with high interest rates. By prioritizing higher-interest debts first, also referred to as the debt avalanche method, consumers end up paying less interest overall and reduce their debts more quickly, Motley Fool reports4. It is also important to start making plans to pay these debts as soon as possible, especially for those households already living paycheck to paycheck. Economic recessions can lead to lower pay rates, unemployment and other situations that can make tight budgets even tighter.
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References:
- Daniel, Will. “Back to Broke? Americans are Racking up Debt and Burning Through Their Savings…” Fortune. 18 Feb. 2023. Accessed on 28 Mar. 2023.
- Konish, Lorie. “41% of Adults are Preparing for a Recession…” CNBC.
- “9 Way to Be More Organized With Your Money.” Ramsey Solutions. 17 Jan. 2023. Accessed on 28 Mar. 2023.
- Etzel, Natasha. “6 Tips to Pay Off Debt Faster When…” Motley Fool. 22 Jan. 2023. Accessed on 28 Mar. 2023.