No one ever prays for a bad day to come. Unfortunately, that doesn’t mean it won’t come because it is inevitable. However, the only way to escape the wrath that accompanies bad days is to be prepared for it. In the same way, you and your family can live above a Recession and its negative impact if you prepare ahead of time. How do you prepare ahead of time? Read further to find out the financial steps to take during a recession.
Before that, let’s explain what is recession and the causes
What is a Recession
It is a dramatic drop in economic activity that lasts months or even years as the case may be. A recession is declared when a country’s economy sees negative GDP, a high rise in unemployment, declining retail sales, and contracting measures of income and manufacturing over an extended period of time.
During a recession, the economy fails, folks lose their jobs, businesses make little or no sales, and the country’s overall economic output falls.
Causes of Recession
Experts have come up with an explanation as to how and why a country’s economy goes into recession. They divided these causes into 3 categories: economic. psychological and Financial. We’ll be looking at these causes in the order of their categories
#1. Sudden economic shock
A sudden economic shock is a situation that occurs suddenly and causes significant financial loss. An example of a sudden economic shock is the incident where OPEC cut off the supply of oil to the United States without warning in the 70s, thereby causing a recession and long queues at gas stations. A more recent example of a sudden economic shock is the coronavirus outbreak, which shut down economies globally.
#2. Inflation
This is a consistent rising trend in prices over time. Inflation is not inherently evil, but excessive inflation is a harmful phenomenon. Inflation is controlled by central banks raising interest rates, and higher interest rates dampen economic activity. In the 70s, out-of-control inflation was a persistent issue in the United States. To break the cycle, the Federal Reserve hiked interest rates swiftly, resulting in a recession.
#3. Deflation
While excessive inflation can cause a recession, deflation can be far worse. Deflation occurs when prices fall over time, causing wages to contract, further depressing prices. When a deflationary feedback loop becomes too strong, people and businesses quit spending, undermining the economy. Central banks and economists have limited instruments at their disposal to address the fundamental causes of deflation. Japan’s troubles with deflation for most of the 1990s resulted in a severe recession.
#4. Enormous debt
When a country incurs excessive debt, the cost of repaying the debt can escalate to the point where they are unable to pay their expenses. The economy is subsequently capsized as debt defaults and bankruptcies increase. The mid-aughts housing bubble, which led to the Great Recession, is a great example of excessive debt triggering a recession. Another example of excessive debt is that of Nigeria to China and other countries. Although they’ve not reached the recession level yet, they’d better hope to God they don’t because the possibility is high
#5. Change in technology
While new technologies enhance productivity and benefit the economy in the long run, there may be a period of adjustment to technical achievements. There were waves of labor-saving technological advancements in the nineteenth century. The Industrial Revolution rendered entire professions obsolete, resulting in recessions and difficult times. Some economists are concerned that artificial intelligence and robots will create recessions by eliminating entire employment categories.
What Exactly Happens in a Recession?
In a recession, economic output, jobs, and consumer spending all fall. Interest rates are also anticipated to fall when central banks (such as the Federal Reserve Bank of the United States) decrease rates to stimulate the economy. As tax revenues fall, the government’s budget deficit grows, while spending on unemployment insurance and other social programs climbs.
When Was the Most Recent Recession?
The last recession in the United States occurred in 2020, at the start of the COVID-19 pandemic. According to the NBER, the two-month downturn ended in April 2020, qualifying as a recession despite its record short duration because it was deep and extensive.
How Long Do Recessions?
Since 1857, the average U.S. recession lasted 17 months, but the six recessions since 1980 averaged less than 10 months.
What Is the Distinction Between Recession and Depression?
Although recessions and depressions have comparable roots, the overall impact of depression, however, is far greater. There are more job losses, higher unemployment, and steeper GDP drops. Additionally, depression lasts longer—years rather than months—and it takes longer for the economy to recover.
To summarize, the effects of depression are more profound and stay longer. The United States has only experienced one depression in the last century: the Great Depression.
6 Financial Steps to Take During Recession
Here we are! The important financial steps or moves to make during a recession to stay escape its negative impact.
#1. Have an Emergency Fund Set Aside
If you keep plenty of cash in a high-interest, FDIC-insured account, not only will your money retain its full value during market turmoil, but it will also be extremely liquid, allowing you to access funds quickly if you lose your job or are forced to take a pay cut.
Furthermore, if you have your own money, you will be less reliant on borrowing to meet unforeseen expenses or job loss. When a recession occurs, credit availability tends to dry up rapidly. When these situations happen, use your emergency fund to meet critical expenses, but keep your budget strict on discretionary spending in order to make that emergency fund last as long as possible and restore it as soon as possible.
Read EMERGENCY LOANS ONLINE: Best Easy Guide 2023
#2. Pay off your credit cards
It may be difficult for you to save money for an emergency fund if you are saddled with high-interest debt, such as that from credit cards. A considerable expense will be added to your monthly budget if you carry a balance on your credit card each month, and if you lose your job during a recession, this cost may become unmanageable for you. When a recession begins, your financial situation will improve proportionately to the amount of debt you have.
#3. Have Additional Source of Income
Even if you have an excellent full-time job, having a source of extra income on the side, whether it’s consulting work or selling collectibles on eBay, is a good idea. With job security so low these days, having more jobs means having higher job security. Diversifying your income streams is just as crucial as diversifying your investments.
When a recession occurs, even if you lose one source of income, you still have the other. You may not be earning as much as you used to, but every little bit helps. As the economy improves, you may even emerge from the recession with a thriving new business.
Read HOW TO MAKE EXTRA MONEY ON THE SIDE: 15 Most Lucrative Side Hustles
#4. Invest for the Future
So what if a 15% decrease in the market reduces the value of your investments? You will not lose anything if you do not sell. The market is cyclical, and you’ll have plenty of opportunities to sell high in the long run. In fact, if you buy while the market is down, you may come to regret it later.
Having said that, as you approach retirement age, be sure you have enough money in liquid, low-risk investments to retire on schedule while still giving your stock portfolio time to recover. Don’t forget, you only need a fraction of your retirement savings at age 66. When you’re 66, it could be a bear market, but by 70, it could definitely be a bull market.
Read 15 BEST PENNY STOCK TO BUY Now 2023 (Detailed Guide)
#5. Build a Budget
Building a budget is one of the greatest ways to prepare for a recession since it allows you to track your costs, understand where your money is going, and find areas where you can cut back. Budgeting is an important skill to have in case prices rise or you lose a source of money. In a challenging economy, creating a budget allows you to gain a clear view of your financial condition and make informed, smart decisions about allocating your money and making it go further.
Begin by keeping track of your expenses for a month or two. Then divide your spending into two categories: essential and non-essential. Rent or mortgage payments, utilities, and groceries are examples of essential expenses, whereas entertainment and dining out are examples of non-essential. Once you have a clear picture of your cash flow, look for ways to cut costs.
#6. Put a Limit to Your Spending
During a recession, it’s critical to conserve resources and focus on the necessities. In addition to creating a budget, you should work on restricting your expenditure in order to lower your monthly bills. Making a budget will help you discover areas where you’re wasting the most money, making this step easier.
Begin by reducing non-essential purchases such as dining out or subscriptions to services you don’t use. Saving money on non-essentials will help you pay down existing debt.
Another excellent approach to controlling your spending is to avoid making impulse purchases. Avoid shopping when you are hungry, stressed, or weary. When you go shopping, develop a list and stick to it to avoid overspending. Before purchasing something, consider whether you truly require it and whether you can afford it. Reduce your expenses by purchasing off-brand products or purchasing necessities in bulk from wholesale stores.
#7. Get a Job that is Recession-proof.
Some sectors, such as healthcare and education, are more resilient to recessions than others. Other sectors, such as retail and hospitality, may be more vulnerable during an economic crisis as individuals try to limit their spending to necessities. You can position yourself for long-term success and financial stability by focusing on gaining in-demand talents and remaining current on industry trends and advancements.
How do You Make Money During a Recession?
Shares may not be as reliable a source of income as they once were, but investors still have opportunities to make money in this market. Even in cases where dividend payments have been cut or ceased entirely, it is likely that those payments will be resumed at some point in the future.
Finding companies that normally have no debt and lots of cash on their books is a necessary step in the process of locating strong dividend stocks.
Conclusion
Wrapping up, even if you have little influence over how things work in the larger economy, you can still get yourself and your family ready for any negative financial consequences that may result from a recession. The above financial steps would guide you in the right move to make during a recession
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Reference
- Investopedia
- Macu
