How We’re Preparing Our Budget for a Recession

Recently, you’ve likely heard many pundits express concern that we may be heading into a recession. As the Fed increases interest rates to attempt to stop high inflation, many people worry that the housing market slow down will help tip us into darker economic times. While my husband and I live frugally, we’re preparing our budget for a recession by making some financial decisions we wouldn’t make if the interest rates were lower.

Our Current Financial Situation

Unlike earlier years in our marriage, our financial situation now is fairly comfortable. We still have more work to go on our finances, but we’re both happy with the progress we have made over the last 10 years.

• We have no credit card debt.
• We have two paid-off cars, a 2004 and a 2013.
• We currently owe 55% of the value of our home, and our mortgage rate is at 3.375%.
• We limit our discretionary spending; we go out to eat less than five times a year.
• We can work from home, reducing the amount of gas we use.

How We’re Preparing Our Budget for a Recession

While we’re happy to be in a stronger financial position if a recession hits, the possibility of one still influences the decisions we are making today.

Holding Onto Our 2004 Vehicle

Our 2004 vehicle has 230,000 miles on it. It’s a Toyota, so it still runs fine, but we’ve wanted to replace it for a few years. We didn’t replace it over the last two years because of the pandemic and then the skyrocketing cost of vehicles. Now, we likely won’t replace it because of the high interest rates.

The paint is peeling off the car, and in the intense Arizona heat, that is not good. Even though we don’t really want to put a lot of money into the car at this point, we will likely pay to have it painted so we can keep it for a few more years. Meanwhile, we are saving for a new vehicle, so we will have a sizeable down payment when we’re ready to buy one.

Opening a Roth IRA

We’ve never had a Roth IRA before, but this year we opened one and started contributing. We wanted to make the investment while the stock market is in a downturn. Hopefully, in a few years, that decision will pay off.

Finding a New Job

Over the last eight years that my husband has held his current job, he has only gotten two raises, once for a promotion and once a four percent raise. He’s been looking for new jobs for the last 18 months and recently took one. His new job will pay him fifty percent more than his current one!

Even though we’ll be moving to a slightly higher cost of living area, that raise will go a long way toward making our finances more secure.

We Have a Plan for Buying a House

My husband’s new job will require us to move 2,200 miles. Unfortunately, that means we’ll lose our excellent 3.375% mortgage rate. My husband doesn’t start the job until the fall, so we’ll likely face interest rates of five to six percent or higher. To combat the higher interest rates, we have a plan:

Find a House That Is Cheaper than Our Current Home

Ideally, we’d like to find a home that costs less than our current home. Buying a less expensive house will help offset the higher interest rates. However, we are not looking for a fixer-upper; we’d prefer a house that has only cosmetic issues. We’re still not sure we can find a house at this price point. If we can’t, we have another plan.

Plan to Refinance as Soon as Interest Rates Drop

When we take out a mortgage in the new location, we plan to refinance as soon as interest rates drop. Doing so will save us tens of thousands of dollars. Even though refinancing is an additional expense, we plan to stay in the new area indefinitely, so we should recoup our money quickly.

Rent If Mortgage Rates Get Too High

Since we won’t move for a few more months, we don’t know how high the interest rates will rise in the interim. We plan to buy, but if the interest rates get too high, we might rent instead. However, this is the last resort because we don’t think housing prices will drop. Instead, we think they may moderate and not rise as quickly.

Our Plan for the Proceeds of Our Current House

We should walk away from our current house with more than enough money for a 20 percent down payment on our next house to avoid PMI. We have two possible plans for the additional cash we’ll have above the 20% down payment:

1. Pay 30 to 40 percent down on the house so we’ll pay less in interest over the lifetime of the mortgage. This is the plan I’d like to implement, but it’s likely not the best decision if we’re heading into a recession.
2. Pay 20 percent down on the house. Then, use the additional funds to pay off our remaining student loans. Use what remains after that to bulk up our emergency fund. We currently have a 1.5-month emergency fund. I would like to see that grow to at least a three-to-four-month emergency fund.

Final Thoughts

We’re preparing our budget for a recession in case one is on the horizon. If we had stayed in our current location, we would be in good financial standing because of the value of our house and the lower interest rate we have on our mortgage. However, my husband’s new job is too good to pass up. We have a plan for moving and minimizing the financial damage, especially if there is a recession. We’re confident that this move will help put us in an even stronger financial position in the next few years, even with the higher interest rates now.

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By: Melissa Batai
Title: How We’re Preparing Our Budget for a Recession
Sourced From: www.dinksfinance.com/2022/06/preparing-our-budget-for-a-recession/
Published Date: Tue, 21 Jun 2022 20:09:41 +0000

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