Avoiding economic hardships; Carey professor warns of the big mistake to steer clear of

Soaring inflation, painfully high gas prices, a pandemic, and war in Europe have instability at the center of attention. But Johns Hopkins Carey Business School Professor Jordan Rippy PhD, says planning now will prevent panicking later.

“Buckling in for the long haul is an appropriate stance,” says Rippy. “How long is it going to last? We don’t know.”

Rippy says the reality is most of us have debt and that can be scary with an unstable economy. But there’s debt that is actually good and then there’s the debt that can severely impact your life.

Good debt vs bad debt

Professor Rippy says having good debt can actually keep you more financially secure. Two examples include having a mortgage or student loans. Paying down a mortgage results in equity in a home as well as potential tax advantages. Also, making that monthly mortgage payment has the additional benefit of improving your credit score.

While student loan debt is financially dangerous because of the interest and how long it can take to pay it off, it can also have a positive impact on your credit score because your payment history appears on your credit report. Making payments on time makes up about 35 percent of your credit score, and helps you develop creditworthiness.

But when it comes to bad debt, Rippy says credit cards or having accounts to multiple streaming services can put people in a bind. She says that, unlike student loan debt, some of those credit card reward programs give cardholders an extra incentive to spend, so make sure you can pay off that monthly bill.

“It’s like taking advantage of a sure win when you pay off your credit card debt,” Rippy says. “Because money that was costing you 18 percent is now costing you zero percent because you just paid it off.”

"But keep in mind that unless you pay your balance in full every month, the interest charges may more than offset the value of your rewards."

Cusp of a recession?

Rippy, who will teach at Johns Hopkins' new 555 Pennsylvania Avenue NW location in Washington, D.C., beginning in August 2023, says some economists are at odds with each other over if and when a recession officially hits, but she’s adamant that a global recession is not out of the question. The war in Ukraine and supply chain issues, particularly with China's sweeping COVID-19 lockdowns, are not helping.

“Inflation is going to be with us for a while,” Rippy says. “We are finding out that inflation is stickier than we first imagined. It’s not going to be a cease and abate immediately.”

"The worst thing you could do," Rippy says, "is to pull money out of your savings account."

“The most common mistake made in a chaotic, sort of recessionary times, is people say, ‘Oh my gosh, I can’t lose all my money, so I’m going to pull it out.’”

"Remember, as long as you’ve parked your money with a government-insured bank, you will be fine. The Federal Deposit Insurance Corporation, or FDIC, insures all bank deposits up to $250,000. But it’s important to know that the FDIC doesn’t cover contents of a safe-deposit box or investments products such as stocks, bonds, mutual funds, annuities, and life insurance policies."

Top five ways to stay financially secure

Rippy is looking across the entire economic landscape for what these kinds of economic situations mean for your finances. Here are five areas of the economy that could mean a bumpy end to 2022.

Q: How can folks save even during such difficult economic times?

Rippy: A la James Clear and Atomic Habits, we know that people who automate their savings do a much better job of continuing to save when their motivation or enthusiasm wanes. Automatic withdrawals from your paycheck into your employer sponsored 401(k) or 403(b) plans are key. You have to reduce the friction and eliminate the need to make a decision to save. Decide one time and then set it up. Employer sponsored plans are what we call tax-advantaged plans, so savings into those plans before savings into some kind of brokerage account is a good idea.

Q: What should people do with that end of the year bonus?

Rippy: If and when you get a bonus or a raise during the year, put some or all of it directly into your savings account. If you do it immediately, you won’t miss it.

Q: How can people avoid staying out of debt?

Rippy: Paying off your consumer debt (namely, credit cards) is like an automatic savings plan. Decide on either the snowball or avalanche approach and then work toward consistently paying off your debts.

Q: How can I take advantage of what my employer offers?

Rippy: If you aren’t already taking full advantage of your employer’s matching retirement contribution, you need to get there as quickly as possible. If you don’t take that, you are leaving free money on the table.

Q: What should people do to clean up their debt?

Rippy: Do a clean-up of the subscriptions that you have accumulated but perhaps don’t use. Coffee subscription? Digital streaming services? Magazines? It is easy to let those accumulate because you forget about them or just never remember to go back in to cancel them when you aren’t using them anymore.