Q.ai - Powering a Personal Wealth Movement, Contributor
Sept. 11, 2022
Are we officially in a recession? No. This economic cycle has not been called an official recession just yet.
- The harsh reality is a recession will impact every single person in some way. We’re all noticing the impact of inflation on the price of basic consumer goods and higher interest rates already.
- During a recession, unemployment rates go up because companies start cutting employees in order to handle the challenges of decreased spending from consumers.
- If your investments are long-term, ride it out and keep to the personal finance basics described below.
You could argue that it's a stagnant economy and that a recession is looming. Some experts have turned to the traditional definition of a recession — a period with two straight quarters of negative GDP growth. Others are quick to point out that the jobs market isn’t behaving like that of an economy in a downturn. Either way, you have to be prepared for the possibility of a recession, even if it hasn’t fully materialized.
Just in case, most people: How does a recession affect me?
A Recession Impacts Everyone
The harsh reality is a recession will impact every single person in some way. We’re all noticing the impact of inflation — increased prices of basic consumer goods and higher interest rates. Your investment portfolios have also likely been impacted by inflation and the threat of a recession. You may have also heard of companies cutting back as they brace for a decline in consumer spending.
How will a recession affect you personally?
During a recession, unemployment rates go up because companies start cutting their workforce in order to handle the challenges of decreased spending from consumers. The employment market turns bleak — there’s less hiring, more layoffs, and fewer financial incentives offered to current employees, like bonuses and raises. Many hard-working people will find themselves out of work through no fault of their own.
You’ll experience volatility with your investment portfolios as well. As we’ve all witnessed during 2022, the stock market reacts strongly to economic news and global conflicts. If you need to liquidate any stocks to obtain cash for a major purchase, like a wedding or a down payment on a home, you may have to choose between selling at a loss or putting off the purchase. If you can, start thinking about delaying any major expenses since it’s important to hold money in your savings account during a recession to protect yourself financially.
While a recession isn’t pleasant, there are ways to soften the blow. Unpleasant as it is, a recession is a natural part of the economic cycle, and it won’t last forever. It’s a critical time to step back and focus on the basics of personal finance: budgeting, paying off debt, saving for retirement, and so on.
How a Recession Affects Bank Accounts
Interest rates will fluctuate based on what needs to be done by the Federal Reserve to move the economy accordingly. As a result of these movements, you will see many swings in interest rates provided by the banks.
Banks also accept that even in the best of times, there will be folks who default on their payments. During a recession, we may see an increase in foreclosures. Banks will be less likely to loan money to potential borrowers looking for a mortgage or a personal loan. It may not be as simple to obtain a mortgage during a recession as it was before since banks will be more stringent with the approval process.
The good news is that if you keep your money in a savings account with your bank, you may see a slight increase in your return as the Fed often increases interest rates to combat high inflation. When The Fed increases rates, banks usually follow suit and raise theirs to attract more customers, which creates more cash flow.
However, there’s no telling how long a recession could last and what kind of interest rate changes will happen to stimulate the economy in the meantime.
But as long as your bank is federally insured, you can sleep soundly at night knowing that your money is safe in your bank account. FDIC insurance protects your savings for up to $250,000 in individual bank accounts, so you don’t have to worry about a recession wiping out your bank account.
How a Recession Affects Credit Cards
A recession impacts credit cards in many different ways. Credit card interest rates are high compared to other types of debt, and carrying a balance can be stressful for many people during good times. During a recession, people may lose their jobs or experience other financial setbacks that lead them to rely on credit cards to get by. In a worst-case scenario, folks are unable to make their minimum payments on their credit cards, and they have to declare bankruptcy.
Other people who carry a balance on their card may see an increase in their monthly minimum payment since interest rates could increase. If you’re one of these people, this means that your debt payment plan could be altered through no fault of your own. You could find yourself with higher debt payments and less income coming in.
Since credit cards are unsecured debt, some people will default on their credit cards during times of uncertainty. Credit card companies respond to this by increasing interest rates to limit losses and increase revenue to cover these expenses. These changes protect the profits of the credit card companies, but they end up hurting anyone who has to carry a balance.
It’s recommended that you recession-proof your finances by focusing on paying down credit card debt and building an emergency fund so you’re prepared for whatever happens with the economy. You don’t want to be blindsided by job loss or increases in your debt payments.
How a Recession Affects Stocks
How does the recession affect the stock market ? If you’ve checked your brokerage accounts at any point in the last few months, you already have a sense of what the answer is here.
Stock prices will typically drop drastically during a recession. The worst S&P 500 decline in our lifetime happened during the last recession in 2009, when the index dropped 55% from its peak in March 2009. Once companies begin to report lower earnings, stocks will drop as investors react instantly to any bad news.
Many investors will pull their money out of the stock market when they hear rumblings of a recession or even high inflation numbers. People want cash and safety, so they start selling their stocks. This leads to massive sell-offs when share prices plummet. So this means that even companies in excellent financial standing will also see shares go down in value. Your stock portfolio will go down, and you’ll feel the pain when you see everything in the red.
Then, to make matters worse, investors will continue to react quickly to any kind of news, good or bad, leading to extreme swings and market volatility for an extended period.
A recession will cause many people to lose money in the stock market due to panic or the harsh reality that companies will decline or even go bankrupt as consumer spending sharply declines. This is why many experts will encourage you to balance your portfolio and to focus on the long run because in the short-term, almost everything goes down during a recession.
How a Recession Affects Bonds
While bonds are seen as a boring investment during a bull market, when a recession kicks in, people are more keen on bonds because they prefer to invest in something less risky. The stability of bonds and getting regular interest payments help investors feel comfortable with bonds.
Stocks will experience high volatility during a recession. Even financially stable companies will see shares drop in value. Bonds are considered a safe haven for many investors since there’s more risk involved in stocks than bonds. During times of uncertainty, people lean towards the fixed-income guarantee of a bond instead of hoping for the capital gain with a stock.
There’s nothing enjoyable about going through a recession. Unfortunately, this is a part of the economic cycle, and we will encounter multiple recessions in our lifetime. What’s our best advice to weather a recession? If your investments are long-term, ride it out and keep to the personal finance basics. You can prepare yourself for a recession by focusing on paying down your credit card debt, building up your savings, and keeping your emotions in check. You don’t want to respond to a downturn emotionally by making rash decisions like selling your stocks when they’re down.
During a recession, many financial risks will also increase as companies suffer, and the risk of default will increase. You must have a balanced portfolio to protect yourself during economic downturns.
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