Economic Recession Meaning
An economic recession is slowdown or massive decline in economic activity. An Economic Recession occurs when a region’s economy declines over a period of months or even years. During these periods, the region’s gross domestic product (GDP), or the total value of the goods and services it produces, declines.
At the same time, there can be dramatic changes in the price of commodities such as oil or gas. Previously profitable industries can suddenly become less valuable. Consumers may experience increased inflation or higher than normal levels of unemployment. Consumer confidence also suffers as a result, meaning people may be less willing to spend than usual.
Example of Economic Recession
In 2008, for example, Americans experienced a significant economic recession following the sudden collapse of the US housing market. Recently, the COVID-19/Coronavirus pandemic has caused major losses in everyday business and employment in various industries, including hospitality, retail and tourism. As a result, the US faced a brief recession in the early months of 2020.
What happens in a Economic Recession?
During periods of Economic Recession, companies experience lower sales and economic growth stops or ceases to exist.
In order to reduce rising costs, organizations may be forced to lay off a large proportion of their workforce, leading to widespread unemployment. At the same time, recruitment is slowing down, which makes it difficult for the newly unemployed to find another job.
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Investments like stocks and real estate tend to lose money, which means retirement and other savings accounts can suffer. Lenders may also respond to increased financial uncertainty by raising their credit requirements, making it much more difficult for people to qualify for new credit accounts.
economic Recessions are an inevitable part of any economy. However, you can weather the storm by anticipating challenges early and preparing for the future.
Five basic steps to plan for Economic Recession.
1. Take inventory of your financial priorities
One of the hardest parts of a economic recession is not knowing what’s coming next and when things will get better. That’s why it’s important to be clear about how you stand financially. When considering your financial situation, ask yourself these key questions.
- How much cash do I have on hand?
- How much money can I get quickly if I need it?
- How much debt do I currently have (credit cards, student loans, etc.)?
- What are my basic monthly living expenses, including food, shelter, health insurance, transportation, and childcare?
- Do you have any significant life events associated with significant expenses (eg wedding, baby or retirement)?
Now is the time to understand what you spend today and anticipate your needs over the next six months. If you’re well prepared for an economic recession, job loss, or other financial setback, you’ll have an emergency fund to cover three to six months of living expenses (and hopefully a healthy nest egg for retirement).
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If you don’t have at least three to six months of basic expenses in cash, set that as your financial goal. Start by developing a basic understanding of how you spend money and budget.
To start budgeting, figure out your total household income from all sources, including you, your spouse, and any side hustles that bring cash into the household. You should also include income from investments and any other sources, such as child support.
Also list your monthly expenses, including rent or mortgage payments, energy, groceries, pharmaceutical and medical supplies, childcare costs, home and car maintenance, debt payments and insurance premiums, as well as any other regular expenses, including those you pay only you annually. Add it all up to understand if you’re spending more, less, or roughly the same as your take-home pay each month. Economic Recession
Finally, prioritize your essential expenses and make sure you determine the minimum you can spend in any given month to get by – in case you or your spouse/partner lose your job.
Your budget may need to adjust in preparation for the economic recession, and that’s okay. Try to cut back on non-essential expenses like entertainment, cable and clothing. While it’s unrealistic to think you can limit all discretionary spending, it’s important to separate wants and needs. Look for areas where you may have overspent. Try to figure out why this happened. Maybe right now you don’t have extra money to put toward retirement or a down payment, which is fine in the short term.
Once you get into the habit of reviewing your finances and looking for trouble spots, you’re off to a great start.
2. Focus on paying off debt if you are able
You may be worried about paying off outstanding debts in the coming months, such as credit card bills, utilities or student loans. If you experience a loss of income, you may have to forgo paying one or more of these bills, so it’s important to understand which bills you have to pay.
If you lose your income, you may not be able to pay every bill on time or in full each month. And this will have a direct impact on your credit score.
Normally, it’s important to do everything you can to keep your credit score intact, but that may not be possible during an economic recession. That’s why you should prioritize how you pay your bills so that your available cash covers as much debt as you can.
- Make sure you pay your rent or mortgage on time and in full. You don’t want to face foreclosure or eviction.
- Make a car payment, especially if you need a car to get to work.
- If you are facing a reduction in income, contact your student loan officer and ask for a resolution application that can give you a few months of no payments.
- Make at least the minimum payment on your credit card. If that’s not possible, contact your credit card company and try to work out a payment plan. (Just know that the lender will likely freeze your accounts, preventing you from making further purchases with the card.)
- If possible, keep up with your medical debt, but do so only after other debts are met first. If your health insurance is offered through your employer, you will continue to receive health insurance coverage even if your medical bills increase. If you buy your own health insurance, whether you’re self-employed or for any other reason, make sure you pay your premiums on time so your policy isn’t cancelled.
Remember, if you fall behind, approach your lenders and ask for hardship concessions. This can include making interest-only payments on your debt or putting payments into relief.
You can also look for a personal loan at your local bank or credit union. There are also online lenders, and your employer may offer a short-term loan program in times of trouble.
You can also ask your credit card company or other lender for a lower interest rate if you make your payments on time. A significant number of major service providers offer programs that may allow you to pay bills later or provide other assistance in times of trouble. You’ll never know what kind of deal you can get with your lender if you don’t ask.
3. Consider your career opportunities, both now and in the future
Economic Recessions often lead to high unemployment rates. So it’s important to consider how tough economic times can affect your career and have a backup plan in case of layoffs.
Start by reconnecting to your professional network. Be sure to consider not only your co-workers, but also any ties you have outside of your current employer. Established relationships in different organizations can give you a huge head start in the job market. You might consider reaching out to your network through social media or offering to meet in person for coffee.
It can also help to update your resume and other job search tools in advance. When reviewing your past work experience, look for any gaps. Are there places where you could further your education or training? Expanding your skills is one of the best ways to invest in yourself as an employee. This is true even if you are able to maintain your position during an economic recession.
For some workers who fear layoffs, picking up a side gig like freelancing or carpooling can be beneficial. Having an additional income stream can not only help in the event of a layoff, but it can make it easier for you to build emergency savings while you’re still employed.
4. Try to boost your emergency fund in advance.
Even if a layoff or layoff is looming, put as much money as possible into your emergency fund. You’ll need every bit of it when the income stops flowing. Waive all extras, including takeout and delivery.
While tapping into your emergency fund is never a decision you should make lightly, losing your job or being forced to live on a reduced salary certainly qualifies as a good reason to use some of the money you’ve been putting aside. However, it is important to rebuild your emergency fund once your financial situation is more stable. Otherwise, when another emergency arises, you may have to make tough decisions like withdrawing money from your retirement account or applying for a home equity line of credit.
5. Try to keep track of your financial situation
An economic recession can be an uncertain time, but the best thing you can do is take proactive steps to prepare. To help you stay on top of your finances during these stressful times, you can trust Equifax to provide you with reliable information on the topics you need to know. Now more than ever, financial education is important so you can feel good about where you are with your money, regardless of any challenges that lie ahead.