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4 Signs Another Recession Is Coming ― And What It Means For You

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What a wild ride the last couple of months have been.

On Dec. 4 the Dow Jones Industrial Average tumbled by almost 800 points, only to rally nearly 800 points three days later. That following Monday, it fell again by close to 500 points, but then recovered to end positively for the day.

A few weeks later, we entered into what is now the longest-running government shutdown in history, with no end in sight.

These events and others have many people wondering if the next recession is looming. The short answer: maybe. Here’s what you need to know about a possible recession and how to prepare for one.

Are We Headed For A Recession Soon?

Here’s the thing: There’s essentially always a recession on the horizon. That’s because recessions, which are often defined as periods of significant economic decline that last at least two consecutive quarters, are a natural part of the economic cycle, according to Zhi Li, owner and financial planner at Twelve Two Capital. “It is reasonable to anticipate that a recession will happen sometime in the future and reasonable to think one might happen soon given the long expansionary period that we are in,” he said.

But as far as predicting when, exactly, a recession will happen, you might as well consult your magic eight ball. Although there are a few data points we can look to when predicting an approaching recession, nailing down a specific time frame isn’t possible. Even so, plenty try.

According to Li, most economists don’t predict a recession will happen this year, but they do think one is likely to happen within the next two. Here’s why.

Signs A Recession Is Coming

Whether or not a recession will occur soon depends on who you ask.

Take the Conference Board’s Leading Economic Index, for instance. It examines 10 leading economic indicators to arrive at a growth or decline rate for the economy, and it helps predict recessions in the months leading up to the downturn. In November, the LEI grew by 0.2, which signals that our economy is still humming along though growth has slowed a bit.

Advisor Perspectives / dshort.com

“The LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession,” according to Advisor Perspectives.

Then again, other common economic measures say otherwise. Here are a few reasons why we might actually experience a recession soon.

Stock market performance is often considered a strong indicator of overall economic health. And historically, stock market peaks have preceded economic downturns by an average of seven to eight months (the actual range is a lot wider). On Oct. 3, the Dow Jones hit its highest closing record for the 15th time in 2018 at 26,828.39, following the record-setting day prior.

Less than three months later, the stock market experienced the worst December since the height of the Great Depression.

Even so, you should take these “signs” with a grain of salt. As the late Nobel Prize-winning economist Paul Samuelson joked decades ago, “the stock market has predicted nine of the last five recessions.” Certain stock market behavior can signify a recession is coming, but by no means heralds one.

A somewhat more reliable indicator is the yield curve on U.S. Treasury securities. “Historically, when the yield curve inverts ― the interest rate on shorter-term treasury bonds is higher than the interest rate on longer-term Treasury bonds ― a recession can sometimes follow,” said Rockie Zeigler III, a certified financial planner and owner of RP Zeigler Investment Services.

How closely are the two correlated? Let’s just say the curve was inverted prior to the past seven recessions. In early December, the front-end of the yield curve inverted for the first time in more than a decade, meaning the yield on 5-year Treasury notes dropped below the 2- and 3-year notes.

Another major number that could point to an imminent recession is unemployment. And counterintuitively, it’s a low rate of unemployment that often signals a slowdown.

Recently, unemployment dropped to 3.7 percent ― a nearly 50-year low. Wages are also growing at the fastest rate since 2009. According to Forbes, strong job market statistics like these indicate that we’re reaching the end of the latest economic cycle rather than the beginning. In fact, an unemployment rate below 4 percent ― which is quite rare ― has often immediately proceeded past recessions.

Finally, as mentioned above, recessions are a normal part of the economic cycle. “While it’s not a very technical indicator, a long run of economic expansion can tell us something, too,” Zeigler said. “We haven’t had a recession or bear market since 2008-2009. The economy has been expanding (albeit slowly) since then. So have the stock markets.”

For these reasons, Zeigler said, we might actually be overdue for slowing economic growth, if not a recession.

What Does This Mean For You?

Zeigler added recessions impact the average person in two major ways. The first is unemployment: “When a recession hits, generally it’s accompanied by rising unemployment,” he said.

The second is spending. “If a person is able to keep their job, they probably won’t be completely confident in spending their money on things like TVs, cars, homes and services because of all the negativity that accompanies a recession,” Zeigler said. “Our economy is very dependent on consumer consumption of goods and services and folks tend to ‘hunker down’ during recessions because they fear losing their job.”

That means regardless of when the next recession hits, it pays to be prepared.

Build up your emergency fund. According to Bradley Nelson, president of Lyon Park Advisors, your top concern during a recession should be staying on top of your bills and ensuring you have a reliable source of income.

“Everyone should have an emergency fund of three to nine months of mandatory expenses, depending upon their circumstances,” Nelson said. “A money market account is a good place to have this stashed.” He also suggested thinking about what skills and resources you have at your disposal in case that fund isn’t enough, including spouse employment, side hustles and part-time jobs.

Know your risk tolerance. Though it can be difficult to predict your own behavior during certain situations, you should ask yourself what you’d do if the market were to drop by 10, 20 or even 50 percent. “If the answer sounds like ‘I’d sell everything to preserve what’s left,’ alarm bells should go off,” Nelson said. “It’s a sign your portfolio doesn’t match [your] risk tolerance.”

If that’s the case, you should reexamine your asset allocation. “Better to come up with an allocation you can live with through thick and thin now, rather than wait for markets to drop and sell your assets at fire sale prices,” Nelson said.

Take advantage of rock-bottom prices. Even though continuing to invest during a major market downturn might feel like lighting money on fire, it’s actually the smart thing to do in most cases. “Investors should have a shopper’s mentality. This means… having a shopping list of quality products to buy at bargain prices,” Nelson said.

In other words, you should aim to sell high and buy low. And though it’s probably hard to think of a recession as an opportunity, for the savvy investor, that’s exactly what it is.

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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