73% of economic analysts predict a recession in the next few years. This article will help you prepare for the next recession. There’s no way to predict when a recession will happen. We can rely on possible predictors but none are considered reliable.
What is a recession?
A recession is defined as a temporary decline in economic activity. This is usually identified by a fall in Gross Domestic Product (GDP) for two consecutive quarters. The GDP is the market value of all goods and services produced in the United States.
The longest recession on record was the Great Depression in 1929, it lasted 3 and a half years. The second largest was the Great Recession which we experienced in 2008. It lasted a year and a half.
A recession is where the economy decreases for two or more quarters. Depression can last several years.
There’s some good news and bad news. The good news is, if you’re financially responsible, a recession can be an opportunity for you to take advantage of lower cost goods, services, and investments.
The bad news is, if you’re investing in your future, you can’t recession-proof your finances. The best thing to do is to continue with your current financial strategy, including your investments and retirement accounts.
Prepare for the recession
You can prepare for the recession by doing 3 things.
Emergency savings is your first line of defense in a recession. For a recession, you should save 3 to 6 months of your basic living expenses. This is when we need to be frugal, trips to vegas and expensive vacations can wait.
Create multiple streams of income as a cushion. Many American government workers felt a blow when the government shutdown. Job security will be the number 1 concern during a recession. When the market value drops, it means less spending both as an employer and as a consumer.
Pay off debt. When the 2008 recession hit many people who borrowed against equity lost their homes. They took out second and third mortgages but when the market crashed they owed much more than their homes were worth. Tackle credit card debt to avoid paying interest during this tough time.
Emotions and money
I think the best strategy with money involves one without emotion. Making a financial decision out of fear is more damaging than the recession itself.
Let’s pretend you have thousands invested in the stock market. In fact, you have exactly $300,000.
Will a recession affect your investments? Absolutely.
Your investment portfolio will take a hit and the money you invested maybe less. At first, you’ll think the smart decision is to pull your money out of the stock market before it drops. However, if you look at the growth of the stock market over time, it continues to grow. History shows us, you’ll be okay.
You can try time the market but it recovers quickly. If you miss the turnaround, you’re losing money.
As a consumer, it would benefit you the most to avoid emotional spending.
One of the most interesting parts of a recession is how it the federal reserve reacts. When our economy is booming, interest rates are higher than usual. While during a recession the federal reserve will lower interest rates to stimulate the economy.
For you, it means with great credit, you can get a decent interest rate considering you have the money to cover payments.
The bottom line is a recession brings with it opportunity, but only for those who are willing to seek it, and for those who are prepared. It’s an opportunity for you to start a business and serve new needs. The recession brings new problems both real and emotional. With those problems, you can be the one to provide a solution.