The news is abuzz with rumors of the next recession coming in 2023 or 2024. But for most Americans, all of that causes a sudden panic and a desperate need to look at their bank accounts.
What is a recession, what does it mean and how can you prepare yourself and your family’s finances for it? This article answers all these questions and more. By the end, you’ll know what to expect and how to prepare for a recession.
What is a Recession?
According to economists working for the National Bureau of Economic Research, a recession is a prolonged period of economic downturn or declining economic activity.
It affects the entire economy of a country or the world and lasts for a few months or more. In some ways, the best way to understand the recession is to compare it to “regular” or positive economic activity and GDP.
GDP (gross domestic product) is essentially the combined value of the goods and services made by an economy, such as the US economy. The GDP of the country grows a little every day/week/month in a standard economy.
When a recession hits, there is no economic expansion. Instead, GDP is negative — the value of goods and services in the economy is declining — for more than two quarters or about six months. People stop spending so much money when this happens because the value of the dollar is falling.
Related: Are we in a recession? This is what economists say
This decline in consumer demand leads to a fall in industrial production, reinforcing the spiral effect and prolonging a recession. A significant downturn in the business cycle, characterized by many consecutive quarters of lower consumer spending, can lead to job losses or high unemployment.
Several past recessions have stalled economic growth and led to the exhaustion of the Federal Reserve or the “Fed.”
These include the recession that led to World War II, the financial crisis of the Great Recession, triggered by real estate speculation in 2008, and the most recent recession caused by the Covid-19 pandemic and the necessary contraction/slowdown of the economy. retail sales in the US economy.
Drawing one recession
Aside from this recession indicator, some typical economic indicators also have other signs and symptoms to watch out for.
These signs include:
- More layoffs than average, a tighter labor market.
- A general, widespread fall in share prices in the stock market.
- More companies are going bankrupt than usual.
- Fewer pay raises or promotions for employees.
Related: Are we facing a recession? It’s complicated.
As for GDP? According to some sources, the US GDP was -1.6% in the first quarter of 2022 and -0.9% in the second quarter of 2022. Technically, that means there’s a recession right now, no matter what people say.
Note that a recession is different from a depression, which is much more serious. In a depression, the economy collapses significantly and many more people can lose their jobs and money.
On the other hand, a recession is usually relatively short-lived. Some people may not feel the impact of a recession, depending on how much money they saved and their financial situation before the recession hit.
In any case, a recession is never good news, which could mean you should prepare for it.
How do you prepare for one recession
Fortunately, there are several ways to do that preparing for a recession. Proper recession preparation can keep your finances safe until the recession eases, helping you preserve your investments, keep your savings account intact, and give your family peace of mind.
Get rid of as much debt as possible (and avoid new debt)
Your priority should be to get rid of as much debt in your name as possible. You should already be trying to pay off debt aggressively. The longer you let it hang around, the worse off your credit will be and the more interest charges you’ll pay over time – it’s money lost.
As you spend more of your money getting rid of your debt, you should prioritize high-interest debt, such as credit cards and high-interest loans. When you get rid of as much debt as possible, you set yourself up for financial success during the potentially turbulent economic times ahead.
Do not take out unnecessary loans or open new credit accounts during this period. If you avoid further debt, you will have more money to spend on savings or necessities, which may be needed soon.
Related: How to recession proof your business
Keep saving aggressively
Speaking of saving, you need to keep saving aggressively or even save more money than before.
During the recession, you may not get an unexpected promotion or raise. Even worse, your job could be in jeopardy if you’re new to a company or are just starting out in your professional career.
In these and other cases, your income streams can unexpectedly dry up. If you save aggressively before that happens, you’ll be well positioned to get back on your feet and weather this economic storm until the skies clear again.
Try to save as aggressively as possible and put that money in a safe savings account. That way, you earn interest on those savings and prevent you from accidentally spending the money.
Diversify investments
Rising numbers and red lines on charts are no reason to withdraw all your investments or blow up your portfolio if you invest in the stock market. You must keep your money in the market; after all, the stock market will eventually bounce back as it always does.
Instead of panicking, you can diversify your investments by dividing your money into different stocks, funds, and other securities and assets. When you further diversify your portfolio, you protect it from economic damage, even recessions.
In addition, diversifying your investments rather than withdrawing from the market will prevent you from losing money in the short term.
Every time a recession hits, some Americans invested in the market sell all of their securities, which only lowers the prices for those securities. They then regret this panicked decision as the market inevitably recovers and many stocks reach higher prices than before.
The bottom line: keep your investments in the market and keep an eye on the price, especially for long-term gains. A recession will eventually pass. Your current positions may be unattainable the next time you have money to invest in the market.
Related: Worried about a recession? Do this to prepare your business.
Increase your credit
Your credit score is also essential during a recession. You should improve your credit score before and during a recession whenever possible, primarily by eliminating high-interest debt, such as credit card debt.
If necessary, move high-interest debt to a new credit card with an introductory 0% APR balance transfer money offer. This can be a great way to quickly pay off any other debts in your name (in line with the tip above) without paying extra interest.
In any case, try to improve your credit rating so that you can take out emergency loans if necessary, and therefore minimize any other costs or financial tensions that you will face in the coming months. Many people feel the after-effects of recessions for years to come, mainly because it hurts their savings accounts or credit scores.
Do not panic
Don’t panic if and when a recession comes along or when the news anchors start talking about it. Contrary to what some may think, recessions are a standard part of the economic cycles inherent in capitalism.
Simply put, recessions are inevitable declines in economic activity that eventually fade. Once people stop panicking about the effects of a recession, economic activity should return to normal and businesses will return to growth.
Just thinking of a recession in this light – a regular part of the economy and not something to necessarily fear – will help keep your head straight as you plan.
Not panicking is crucial, so you keep spending and saving money, which are essential actions to do your part to prevent the economy from going down even further.
Overview
Recessions can be financially uncomfortable, but they are far from devastating if you take the right steps in advance. Proper preparation and patience will go a long way in strengthening your bank accounts and protecting your finances through the coming recession until the market picks up again.
Want to expand your financial knowledge with more articles like this? Discover more articles about money and finances from entrepreneurs here.
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