Recession Basics: What to Know and How to Prepare
Although some experts aren’t convinced a recession is in our near future, it can’t hurt to educate yourself on the possibility. Let’s start with the basics:
What is a Recession?The National Bureau of Economic Research (NBER) defines recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. These financial experts will declare a recession based on many factors over an extended period of time, typically two successive quarters. Some factors that could indicate a recession are a decline in Gross Domestic Product (GDP), rising unemployment, interest and inflation rates, reduced consumer spending, and the stagnation of industrial production and retail sales.
While the thought of a recession may leave you feeling uneasy, if you’re reading this blog there is a good chance you have lived through a recession – or two or three – in your lifetime, and you made it through to tell the tale! A recession is a normal part of the economic business cycle, defined here by the Corporate Finance Institute®. Which brings us to our next question...
How Long Does a Recession Last?According to this article from Forbes, the NBER places the average recession at 17 months if you look back to 1854. However, if you only consider the post-WWII period, the average American recession has lasted 10 months. The last major recession was The Great Recession, which lasted 18 months, from December 2007 through June 2009. We won’t go into detail about that today, but just know that the length of a recession really depends on many factors out of your control. All you can do is prepare.
How to Prepare?The most likely way that you may be affected by a recession is by the rising unemployment rate. In a recession, many employers may be forced to make the tough decision to reduce employee pay and/or benefits or lay off employees in order to save money and stay afloat. If you find yourself without a job in the midst of a recession, it may also be tougher to find a replacement job as more people could be out of work looking for employment. In addition, you may find yourself losing money as investments in stocks, bonds, real estate, and other assets can lose value in a recession.
All of this to say that the best way to prepare for a recession is to have your finances in order by:
- Getting a start on saving.
- Setting a budget – and sticking to it.
- Paying down debt as much as possible to avoid rising interest rates.
- Reviewing your accounts to find potential savings.
- Building your emergency fund.
- Talking to a Financial Advisor about your investment and retirement accounts.
Remember, the economy is everchanging and if we were to enter a recession, it’s not going to last forever. At CommunityAmerica, it is our goal to provide all of Kansas City with the tools and resources needed to guide our members through uncertain times to achieve financial peace of mind. If you feel as though you may need to make changes to your accounts and policies ahead of a possible recession, please contact a professional Wealth or Insurance Advisor for further advice. Our Well-Being Coaches are also available to answer any questions you might have regarding budgeting, saving, or financial wellness in general.