WHAT DOES A NORMAL “RECESSION” LOOK LIKE?
It has been a while since everyday people have experienced a recession. In fact, the last official recession ended in June 2009 after lasting a whopping 18 months!
WHAT IS A RECESSION?
Politicians often say, “A recession is when your neighbor loses their job; a depression is when you lose yours.”
Wikipedia defines it as:
- A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
- In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters
“A recession is when your neighbor loses their job; a depression is when you lose yours.”Harry S. Truman
WHAT DOES A RECESSION LOOK LIKE?
Workers in certain areas of the economy (Energy, Retail, or Manufacturing in particular, but there are others) may feel like they never got out of the last recession! Meanwhile, the country as a whole has recovered well from the last recession which ended in 2009. So for those not working in areas that are still suffering, here are some examples of what a recession looks and feels like and what tends to happen during one.
WHAT HAPPENS DURING A RECESSION?
Typically, during a recession, employees are laid off or experience reduced paid hours. The jobs they had go through technological changes and automation. Sometimes networks of coworkers become fractured as some lost income and social status. Basically, it is a bad time for workers and business owners, and everyone must adapt to maintain their financial security.
Industries that depend on some of these sectors may also see declines in growth and may need to cut back on hours or income. Employees in these industries find themselves tightening budgets, spending less, and worrying more (if they can get the work).
WHAT HAPPENS AFTER A RECESSION?
Once it all ends (often a few months to a little more than a year and a half) either the employees and employers innovate and work their way out of it by reinventing themselves, or they don’t and stay stuck.
Over time, society innovates our way out of it and a new economy is developed. The challenge for most individuals and households is figuring out how to get out of the bad times as quickly as possible. Unfortunately, there are winners and losers in recessions, and it can be hard on everyone.
WELL IF IT IS ALL GOING TO BE “OK” EVENTUALLY, WHAT IS THERE TO WORRY ABOUT?
Most modern recessions last between 6-18 months and they happen around every 10 years. There have been bigger recessions which have lasted much longer, the last of which was in the 1930s. During the 6-18 months the unemployment rises and the opportunity for employment goes down. Things you’ve come to expect now, like regular work hours; friends and family being there to bail you out in a pinch; and your lender or credit card company being willing to increase your credit line when you need more spending power can all change quickly. In other words, access to the sources of money you are used to may change, during a typical recession.
If you haven’t been preparing and innovating financially before a recession, you’ll have plenty to worry about once a recession hits.
PRACTICAL TIPS TO GIVE YOU AN ADVANTAGE IN THE NEXT RECESSION.
Review Your Financial Plan – ask yourself:
Do you have a written Financial Plan?
If you do, have you “stress tested” it lately?
Have you asked yourself what happens if your plan fails?
For example, what if you don’t have access to your cash or reserves right away?
What happens if “life” (a move, a health change, a family change) gets in the way of your plan.
Stress testing your plan does not make it error proof. Rather it makes you aware of various potential outcomes. This awareness can help you identify how to behave under financial stresses which you may not be fully aware of during the “good” times.
Identify how many months you can cover your basic financial needs if your income stopped?
Creating an emergency fund and filling it up with 4-24 months of money to cover your necessary spending is really important before a recession.
The number of months and “necessary spending” is key in this point.
About 40% of the working population is either self-employed, the primary owner of their own company, or works for a “small” business. These folks are fully committed to their industry and job. If the market for their goods and services changes it may not be too easy for them to just hop to another gig. It is logical for those employed by small businesses to plan on a relatively larger number of months of financial cushion.
For those working for larger companies (especially in fields where the work is broadly needed and not easy to automate) the likelihood of being able to get back to work after being laid off or losing hours is higher. These folks can likely have a bit less in savings due to the higher probability of being able to change employers after a layoff.
Review your Investment Risk Tolerance
When your investments are losing value at the same time you don’t have a job, things can get dicey fast. Our minds and sometimes friends or family, can make us do crazy things!
In this situation it is common to want to sell investments at just the wrong time, to keep your basic needs covered.
A key goal of investing is “buying low and selling high”. But when the bad times befall everyone, you may feel like you need to break that key goal just to survive. This can have devastating consequences on your investment portfolio.
One way to shield you from needing to “sell low” is to understand how much risk of loss you are willing to take before that loss actually happens. Humans are notorious for being “pro” risk in the good times and “anti” risk in the bad times. This is exactly the wrong strategy for successful investing and having a really solid handle on your tolerance for risk can go a long way to maintaining a solid strategy.
Taking a Riskalyze assessment is a great place to begin to understand where you stand in your risk tolerance before a big investment value change (up or down) occurs.
Plan for a Health Problem
Even with all of the above planning, unforeseen events happen. One of the most common reasons for financial distress is a problem with our health. Financial issues come from believing in myths like “It won’t happen to me” and from the very real fact that the relative cost of adequate health insurances may be too high to cover, especially in a recession.
A solid and realistic plan for covering heath needs is crucial to being well prepared to handle a recession.
BEST ADVICE OF ALL: DON’T FREAK OUT!
Recessions come and recessions go. Panicking helps no one, especially you! Maybe you slid through the last recession unscathed or maybe you were too young to care. Or maybe you remember the last recession vividly and are still nursing old wounds from that era.
In either case, preparing for the recession we may or may not already be in is key to surviving it!
We can help you get a plan in place, assess your risk tolerance, and plan for good and not so good times that may come our way.