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How to get your finances ready for a possible recession

CHERYL CORLEY, HOST:

Earlier this week, the Federal Reserve raised interest rates by three-quarters of a percentage point. It's the fourth time the central bank has raised rates this year, all in an effort to tame inflation. But that means it will be more expensive to borrow money and carry certain kinds of debt. We wanted to learn more about what the changes in the economy mean for you, so we called Michelle Singletary. She's a personal finance columnist for The Washington Post and author of "What To Do With Your Money When Crisis Hits: A Survival Guide." Michelle Singletary, thanks for joining us.

MICHELLE SINGLETARY: Thank you for having me.

CORLEY: Well, let's start with this week's news. The Federal Reserve raised interest rates by three-quarters of a percent. That's the fourth rate hike this year, as I mentioned. Can you talk a bit about what that means for everyday Americans?

SINGLETARY: When the Fed raises rates, it impacts your ability to borrow. And so it's going to cost you more to get a mortgage. It'll cost you more to get an auto loan. If you have a credit card, it's going to cost you more if you are revolving that debt from month to month. So any borrowing costs could impact you when the Fed raises their rates, which means that you might not be able to afford that house or as much house as you want or, you know, a big car loan. If you're carrying credit card debt, you must - you must try to do as best you can to get rid of it because it's going to cost you more.

CORLEY: So people with these - that may have a large debt load, how should they really approach paying off that debt?

SINGLETARY: When it comes to your debt and which ones you should prioritize, I like the method where you start with the one with the lowest balance, the smallest balance. Now, in this environment where interest rates are higher, people are focused on that. But psychologically, if you could have a quick win - so you list all your debts from smallest to the largest. Let's say you have a credit card balance of $1,000, but you've got a personal loan for $10,000. If you're picking away at that $10,000, even though it has the higher interest rate, you get defeated quickly. But if you can concentrate and get rid of that thousand-dollar debt first, it tends to energize you. It motivates you. And next thing you know, you are attacking that $10,000 like you've never attacked it before.

CORLEY: There's also some good news, though, right? I mean, for example, if you have a savings account - a high-yield savings account that's going to earn more money annually and perhaps higher interest rates will cool down inflation. Yeah. Are there any benefits to this uncertain time? And if so, how do people take advantage of it?

SINGLETARY: Yeah. So one of the benefits right now - and I've written about this in my column in The Washington Post - is that I bonds, which - they are indexed to inflation. So they're designed to keep pace with inflation - are paying a guaranteed, at least for six months by the time you buy it if you buy it by the end of October, 9.62% - so almost 10%. It is a - not a well-known savings tool. So it's I bonds. You have to buy it through the government, treasurydirect.gov. You set up an account. And you can buy up to $10,000 per calendar year. And also, you know, the thing about this is that because the economy is front and center in everybody's mind, I think people are concentrating on their money more. And that's a good thing. Even if you're not struggling, it's a good thing to look at your finances. If you're struggling, of course, you already know things are tight, but perhaps there's some other things that you can do to weather this storm until we get through it.

CORLEY: Just exactly what I was going to ask you about because you recently put up a quiz on The Washington Post's website to gauge if people are ready for a recession. Given all the talk about recession, what should people do to prepare for it?

SINGLETARY: That's such a great question. I like to tell people that I act as if I'm in recession all the time. And people are like, well, that's kind of depressing. And I was like, no, it's preparation because if you're always positioned that something is going to happen, you are always on alert on how to handle your money. And so one of the reasons why we did that quiz is that there are really three groups of people. And when you take the quiz, you'll end up in one of these three groups. There's people who are - they're just struggling at. This - you know, inflation goes up 1% and they are hurting. And so this group of people, I wanted to give them some tips on how to handle it, like budgeting. Look at your housing situation. Maybe you need to move in with someone or get a roommate. Or if you're a young adult, I know you don't want to hear it, but go back and live at home if you can. So that's the first group.

And then the second group is it's painful, but you're not going to lose your house. It's painful to pay more for gas, but you still can do it. And we wanted you to recognize that, yes, this is impacting you, but it's not as scary or dire as you might think. However, it is a wake-up call to save more. It is a wake-up call to get rid of that credit card debt that you've been keeping around. And then the third group is, you know what? You're OK. You've got plenty of savings. You've got a secure job. You're funding your retirement account. You're doing OK. It doesn't mean that you aren't feeling the anxiety of what's happening. But that group of folks, I want you to know it's OK if you go ahead and take their vacation. It's OK if you continue to eat out.

Because here's the thing - if that last group of people pulls back, we will definitely be in a recession. They have the ability to keep spending. And I don't want their panic to, you know, send us into a recession. We need those folks to go out to the restaurant. And listen, I get it. That chicken meal might cost you $5 more, but you can afford it. And guess what? You'll keep people employed. You'll keep that business going until we get into better times, and that's a good thing. I'm not saying do anything that you can't afford, but if you can afford to do it, go ahead while you also continue to watch your budget. If things change, you pull back.

CORLEY: That's Michelle Singletary, personal finance columnist for The Washington Post. She's the author of "What To Do With Your Money When Crisis Hits: A Survival Guide." Michelle Singletary, thank you so much for joining us.

SINGLETARY: Thank you again for having me. Transcript provided by NPR, Copyright NPR.