When a recession hits it affects everyone in the economy, but the poor are often hit the hardest. In this article, we’ll take a closer look at what a recession is, how it impacts the poor, and three practical actions that can help during a recession.
What is a Recession?
A recession is a period of time when the economy is not growing or is experiencing a decline in growth. It can be caused by a variety of factors, such as a decrease in consumer spending, a drop in business investments, or a decline in exports. The last major recession in the United States occurred in 2008 and lasted for several years.
Which 5 Actions Make Sense in a Recession?
While a recession can be a challenging time for everyone, there are actions that you can take to help protect yourself and your finances. Here are three practical actions that make sense during a recession:
- Cut Back on Expenses
One of the first things you should do during a recession is to take a close look at your expenses. Identify which expenses are essential and which ones you can cut back on. For example, if you are eating out several times a week, consider cooking at home instead. Cutting back on expenses can help you save money and free up resources to pay for essential bills.
- Build Up Your Savings
During a recession it’s more important than ever to have a savings account. You never know when you might face unexpected expenses, such as medical bills or car repairs, so having a rainy day fund can help you weather the storm. Even if you can only save a little bit each month, it will add up over time and give you some financial security.
- Look for Additional Sources of Income
If you have lost your job or are struggling to make ends meet, consider looking for additional sources of income. This can include taking on a part-time job or selling items you no longer need. Every little bit of income can help during a recession.
- Prepare Rather Than Predict
Many investors want to pursue recession indicators and often mean well in this pursuit as a motivator in pursuing these indicators is usually a need to protect capital from a potential downturn. However, the best option is usually to be data-driven and have a clear plan. It is important to have a financial plan that is set on firmly-laid financial goals. Therefore it is possible to change the inner narrative of what to expect during a recession. By having a clear financial plan, investors may come to realise their expected decline is the exception rather than the norm—and mostly impartial to the final outcome they are seeking in relation to their goals. Everyone has a unique circumstance and this must be evaluated, but to the best of your ability, it usually makes sense to stay invested.
- Look at the Shape of the Recession
Recessions come in multiple shapes and sizes, with some being more important than others. Many investors make the mistake of looking at previous recent recessions and expecting the next to be the same, which is a mistake. So, familiarise yourself with the different shapes of recessions as this is necessary to appreciate the potential outcomes. And when it comes to your analysis of the recession and what to look out for you should be looking at the following three things:
- Is there evidence of excessive leverage?
- Is there a danger of industry obsolescence?
- Are people paying excessive amounts as asset valuation?
Most recessions will come to pass, but if all three of the above are present the sensible path could be to position portfolios in a recession-resilient manner.
By taking practical actions, you can help protect yourself and your finances during a recession. Cutting back on expenses, building up your savings, and looking for additional sources of income are all actions that make sense during a recession and when it comes to your investments it is important to know the shape of the recession in order to know how it will affect you and your investment and you have got to prepare to best suit want you want as an outcome.
And remember we can’t resist recessions, we resist the temptation to do something that feels good in the short term but causes mistakes in the long run.
