If you read financial news, you've probably seen the word "recession" appear more times than often to believe that the economy is currently experiencing one.
The irony is that you'll not know that you are in a recession until it's well underway, and according to a recent Morning Consult survey, 25% of U.S. people anticipate a recession within the next year, while 46% say one is already underway.
Nobody can predict the future with certainty, but by being aware of the ups and downs that are typical of economic cycles, you can make the necessary plans and preparations to make sure that you and your family are prepared financially for whatever the future may bring.
A recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months. An economy is said to be in a recession when there are two consecutive quarters of contraction. However, since the GDP is only reported after a quarter is over, the recession would have been well underway for a couple of months by the time the GDP turned negative
Recessions are always caused by imbalances in the market, triggered by external or internal factors. These could be a loss of consumer confidence, credit crunches, high-interest rates, a stock market crash, and asset bubbles bursting.
There are various ways a recession can affect you. The common theme among all the different ways is that money-making opportunities dry up during a recession. Let's have a look at the different ways a recession can affect you
During a recession, companies would be cutting their workforce to save costs. Since there is less money to go around, companies would find it challenging to fund their operations and staff salaries. There would also be hiring freezes meaning people would be unable to find jobs or could lose existing ones. If you lose your job, you would also lose your health insurance from your employer, putting your family in a difficult position as you would have to shop around to find new coverage.
Consumer spending usually decreases during a recession, thereby putting less money into the economy. The lower levels of patronage affect the revenues and earnings of companies. Given that investors are only concerned about profits, declining earnings are usually a signal that a company is not doing well.
A recession is often caused when interest rate hikes are used to slow down the economy due to rising inflation. Since companies fund their operations by borrowing, this means the cost of borrowing goes up. To balance this, companies pass the added costs to consumers which reflects as an increase in prices of goods and services. As a result, everything becomes more expensive in a recession.
Given that the price of goods and services has gone up, this decreases your purchasing power. This means that you would have to spend more to get the same item. There are also hidden sides of lower purchasing power. One of such is shrinkflation - this is when you buy a product at the same price but at a lower quality or amount. For example, you could purchase your favorite cereal for the same amount, but the contents (grams) have been reduced. Retailers and manufacturers often do this if they do not want to scare consumers away with higher prices.
Recessions come after a period of inflation. Inflation is when the prices of goods and services are on the increase. To bring the prices down, the central bank increases interest rates. However, this increase in interest rates means that borrowing costs increase. As such, you would be paying higher interest rates on your credit card, mortgage, student loans, etc.
Because borrowing costs are high, defaults on loans are also likely to increase. As such, banks and financial institutions are more reluctant to give out loans during a recession. They also factor in the fact that you could lose your job, have your wages cut, and lower purchasing power all of which make it difficult to keep up with your repayments.
Recessions are a normal occurrence in an economic cycle. While you cannot avoid it, you can prepare for one and come out unscathed. Here’s what you can do right now to prepare for a recession:
When a recession comes, its time to bring your debt levels down aggressively. You don't want to be stuck with higher interest rates amidst lower purchasing power and the possibility of losing your job. You can start by paying the loans that have the highest interest rates first and working your way down.
You don't need to be in a recession to have an emergency fund. However, having one in periods of recession would do you a lot of good. This is because the extra savings can be used to augment in areas where your income can't keep up. It can also come in handy in the event of a job loss or reduced wages. Also, recessions come with opportunities to buy assets for cheap since many people would desperate for cash and may want to sell off their assets cheaply. You should save at least 6 months of your living expenses.
In order to safeguard oneself during a recession, you might want to consider starting a side business or finding a second part-time work. Alternatively, you can ramp up investments in certain sectors. Contrary to popular belief, recession is a good time to invest. This is because you get quality investments at cheap prices.
The market will respond to any news during turbulent periods, so you may anticipate significant volatility that will be hard to withstand as you see your portfolio decline. A recession is characterized by decreased economic activity and a falling stock market.
The uncertainty brought on by rising inflation will force novice investors to dump equities. As investors begin to leave the stock market in search of more money and security, share prices continue to fall. Real-time observation of this vicious loop in action is highly challenging.
Making your portfolio more defensive can help you manage uncertain times and be prepared for rising volatility.
All of us will be affected by the recession in some way, but that doesn't mean we need to worry about it excessively or overreact to the market decline. If the worst-case situation arises, a little advance planning can really assist you in getting through it. As there are still two meetings left in 2022, where the Fed will be closely monitoring the economy to determine whether rate hikes should continue, we are still unsure of whether a recession will be declared.
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