There’s a lot going on in the world. In addition to the coronavirus pandemic, there are rumors of a looming recession. You have likely heard one of two things by now:
- We are in a recession, or
- We are about to go into a recession
In either case, it’s good to know precisely what a recession is, how to prepare for one, and tips on how to get through it.
Article Table of Contents
Definition of Economic Recession
A Recession is a period in the business cycle when economic activities are in a general decline, typically accompanied by elevated unemployment, a fall in consumer spending, an increase in business failures, and falling stock markets. As scary as they are, recessions are a normal occurrence in the modern economy (see below image of typical business cycle). A recession follows the peak of the business cycle.
In the U.S., recessions are declared by the National Bureau of Economic Research‘s business cycle dating committee – which, despite its name, has nothing to do with Tinder.
The dating committee is a bunch of renowned economists who gather to assess how the economy is doing. They determine when recessions formally start and end.
The committee weighs several factors in its decision, but a commonly used definition of recession is when the total value of goods and services in the U.S. (called the Gross Domestic Product or GDP) is in decline for two or more quarters ( six months or more).
Are we in a recession?
Yes and no.
Yes we’re in a recession but it’s not official yet.
On one hand, because the data isn’t nailed down and the committee hasn’t officially said so, we are not in a recession yet. BUT, because the committee usually retroactively calls recessions, we are more than likely in a recession. (For context, the committee declared in December 2008 that the Great Recession had started in December 2007 – a full year later!).
We need at least 2 quarters of negative GDP to declare it a recession. The first quarter of 2020 saw a decline of 4.8%. If we see another sequential quarter decline in GDP, the committee can officially say we are in a recession.
Impacts of a recession
Recessions, while a normal part of the business cycle, can be very destructive because it causes a rise in unemployment. As unemployment rises, consumer spending falls because people don’t have money for the discretionary items. People also lose their homes because they can’t afford the mortgage payments and young people can’t get a good job after school. Investments lose their value and businesses go bankrupt.
Difference between a Recession & a Depression
A recession can become a depression if it lasts long enough. As a reminder, a recession is an economic contraction of two or more quarters. A depression will last several years.
How to Prepare for a Recession
It’s all about the long-term. Recessions since the end of WWII have lasted anywhere from six months to sixteen months, with the average lasting 11 months.
Recessions are going to happen and there’s nothing any of us can do about it. The critical take away is that we need to be prepared. Is it possilbe to recession-proof your finances? The answer is yes and here are some specific ways you can do it:
- Pay Off All Debt
Debt is a problem even when the economy is booming. But, it’s an even bigger problem during recessions, when you may be facing the possibility of losing your job or experiencing a serious decline in the value of your investments.
Whether it’s credit cards, student loans, medical bills, or any other type of financing, the more you can eliminate, the fewer payments you will have. That will make the loss of your job that much easier to deal with, especially if you’re unemployed for several months.
If you can’t pay off all your debts, pay off or pay down as many as you can. The more you can pay, the stronger your financial position will be if your personal financial situation starts to look shaky. - Increase Your Emergency Fund
Emergencies can happen in times are good, but they tend to be more frequent in recessions. Having a well-stocked emergency fund is the best way to prepare in advance. - Build Your “IA’s” – Intellectual Assets
This is all about improving your skills and qualifications. If a recession is coming, or already here, one of the best strategies to keep yourself relevant on a career front is to improve your abilities. That might mean getting an advanced degree. But, it could also mean taking online courses or getting an important certification – anything that could help your career move forward and/or increase your earning potential. - Create a Side Hustle
Get a job that supplies additional income and provides a way to diversify your income sources. It could be an online business or driving for Uber or a food delivery service.
Tips to Survive a Recession if You Lose Your Job
- Get On a Budget
If you aren’t already living on a budget, the time is NOW!
For more on why a budget is so important and how to set one up, click here.
Look for ways to cut..subscriptions, groceries, utilities, etc. Everything that isn’t “locked in” and cut back. - Take care of the Four Walls
When the going gets rough, focus on the things you really need to survive: Food, Utilities, Shelter, Transportation. - Pause paying off debt
When you’re just trying to make it to another day, you don’t need to pay extra on your debt. Instead, focus on piling up cash as high as you can. This will help with peace of mind until you have income again. Once life gets back to normal and everything is ok, you can pickup where you left off with your debt payoff plan. - Sell Stuff
Look for things to sell around the house and list them on on Amazon Marketplace, Poshmark, Mercari, Your Local Facebook page, Craigslist, etc. Sell so much stuff that the kids think they’re next! - Look for a side hustle
This may not be your ideal way to earn a living, but when they going gets tough, the tough get going. Get out there and do what you can to earn extra cash to survive this difficult time. - Don’t lose hope
You may be losing a paycheck, but that doesn’t mean you need to lose your hope too. Hang in there!
Summary
While recessions are “normal”, they are difficult to navigate and often devastating if unprepared for one. The best things you can do are to prepare by cutting back on your expenses, paying off debt, and building emergency savings. And, if you find yourself out of work, make sure you budget to cut back where you can. Focus on the 4 walls, sell stuff, and look for a side hustle.
Most important, don’t lose hope!
Have questions?
Please feel free to contact me either through a message via my blog or email me @ moneysmartjackson@gmail.com.