January 8, 2024

How to Prepare for a Recession

Economics is an unpredictable field, and it can often be a confusing one, too. Media reports may claim a recession is coming, but others say the recession is off the table. So what indicators should you look for?

We might be in an economic slump, but to understand the how and why, we need to look at what a recession is. Doing so is the first step in knowing how to prepare for a recession if one does happen. Because knowledge is power.

What is a recession?

According to the National Bureau of Economic Research, a recession is “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.”

Gross domestic product (GDP) is the total value of goods a country produces annually or over a set period. These goods are sold, exported, or traded and help fuel the greater economy. When that activity slows, it indicates an economic downturn.

How long do recessions typically last?

Recession length is not guaranteed. A recession might last months or years.

Some definitions say the GDP decline must last at least two quarters (six months), but this isn’t set in stone. The NBER designated February to March 2020 as a recession despite it lasting only two months.

Here are some past recessions and their lengths:

- The Great Recession: December 2007 to June 2009 (about 18 months)

- The Dot-Com Recession: March to November 2001 (about eight months)

- The Gulf War Recession: July 1990 to March 1991 (about seven months)

- The Oil Shock Recession: November 1973 to March 1975 (about 16 months)

What is a depression?

A depression is a more severe type of recession. There’s no official definition, but economists refer to extreme or prolonged recessions as depressions.

The Great Depression of the 1930s is infamous, spanning over a decade from 1929 to 1941. It was the longest, deepest, and most devastating American depression in the 20th century.

Recessions in context: Examining market stages

Recessions are part of a larger market cycle that features several distinct phases. Here’s a general idea of what they look like:

1. Expansion

The economy grows, corporate profits grow, banks are less restrictive about lending, unemployment declines, and GDP expands.

2. Peak

Prices for goods and services reach all-time highs (ATH). In turn, GDP remains stable, and consumers are more leveraged and cash-fluid, making extensive and frequent purchases. Unemployment also tends to be extremely low but not in decline.

3. Recession or depression

Everyone, from consumers to businesses and lenders, experiences a slump. GDP plummets, and goods and services are exchanged less frequently. Unemployment rises. Consumers spend less, make late payments, and sometimes cannot pay debts at all.

The government may offer tax cuts or roll out fiscal and monetary policies to help those struggling. The Federal Reserve will increase or decrease interest rates to stabilize the market.

4. Trough

The economy hits bottom. Indicators like GDP and unemployment aren’t worsening, but they aren’t good, either. This is when some may begin to prepare for recovery and expansion, but there’s no guaranteed way to predict the future.

Economic indicators of a recession

To learn how to prepare for a recession, you must recognize the essential economic indicators.

GDP statistics — a prevalent indicator — offer a reliable measurement of economic health, but numerous other indicators show how close the economy is to a recession or how deep it is into one already.

These indicators fall into three categories: leading, lagging, and coincident. Leading helps predict future events. Lagging shows past events. Coincident indicators unfold as events occur.

Here are some examples:

- Leading: The stock market, consumer confidence index, inflation

- Lagging: Unemployment rates, corporate profits, loan delinquencies

- Coincident: GDP, personal income

How can a recession affect me?

So, what does a recession mean for the average person? A recession will financially affect you and your family, mostly in unwelcome ways.

Widespread job loss

An economic downfall means companies and employers may let people go, so expect layoffs. Entire departments or teams may be shuttered to save money, and businesses may fail.

An unstable job market makes it difficult for those who lose their jobs to find a replacement. That’s why it’s always best to set aside an emergency fund. Experts recommend keeping three to six month’s living expenses stashed away.

Failing investments

With the economy and market in a downward spiral, any investments you hold — stocks, bonds, real estate, or other assets — can lose value and take a long time to recover.

Unmanageable debt

A recession creates ripples across the market, decimating those in severe debt. Without a job, many can’t afford their mortgages and may lose their homes.

Banks and lenders also tighten lending policies, increasing interest rates. Getting reliable financial help is more complicated.

How to prepare for a recession: 10 steps to protect your finances

Whether or not you’re preparing for a recession, careful financial management is vital. Here are some proven effective ways to get to a better place in your personal finances:

1. Take a hard look at your finances, and balance your budget by ensuring you spend within your means.

2. Make a savings account or emergency fund a top priority. Cut down on frivolous spending and deposit excess funds into your savings. Setting short-term financial goals works best.

3. Put emergency funds in a high-yield interest account. But ensure they’re liquid, meaning you can freely access them.

4. Pay down high-interest credit cards and loans. Use a balance transfer to pay down credit card debt with lower interest. Refinance accounts with variable interest rates and prioritize fixed interest rates.

5. Don’t neglect your needs. Try to pay down debts without dipping into your emergency funds or savings.

6. Don’t take on additional debts unless necessary. Avoid large purchases.

7. Take on side gigs or side hustles to create additional sources of income.

8. Don’t panic and pull investments. It’s a self-deprecating move if you have a diversified portfolio, which is always recommended. Remember, markets are forward-looking, which means they’ll eventually recover. If you trust the investment, trust in the plan, especially if retirement is far off.

9. Don’t neglect your career. Yes, a recession is a challenging time to look for work or pursue opportunities, but you shouldn’t halt your progress. Strengthening your skills or pursuing more training and education are great ways to secure yourself during a recession.

10. Don’t assume a timeline. Recession severity varies. Prepare for the worst, and hope for the best.

You might also consider consulting a financial advisor to help with budgeting, managing debts, and choosing the appropriate investments.

Do house prices drop in a recession?

With fewer qualified buyers, mortgage rates and house prices drop during a recession.

If you have the money, a housing market recession is an excellent time to invest. Just remember, the economic downturn could continue its downward trend, so big purchases might put you in a tight spot if you are laid off or lose your income.

You should always know what expenses will factor into your home budget. Things like parking costs, insurance premiums, transportation, out-of-pocket costs, emergencies, and more.

How do you make money in a recession?

Making money during a recession is about investing your personal finances in assets or channels currently in a downward trend that will eventually see an upside after the recession. A recession is usually followed by robust economic growth.

During a recession, stock market performance and prices decrease, becoming more affordable. If you have the funds, investing in long-standing companies that sell consumer staples or everyday necessities is a safe bet.

You might also consider contributing more to a tax-advantaged retirement account or open one if you haven’t already. Additional investments could include real estate and similar money-bearing assets.

Your recession survival guide starts with EarnIn

No one can predict a recession with total accuracy, so it pays to be prepared. EarnIn’s innovative app offers integrated tools and resources to help you stay informed and empowered.

Our Cash Out tool lets you access your pay as you work instead of waiting days or weeks for payday. You can get up to $100 a day and up to $750 every pay period with no credit checks, no interest, and no mandatory fees. EarnIn is excellent for timing your everyday expenses, recession or not, giving you the flexibility to take on challenges and reach your goals.

If you’re looking for a powerful, user-friendly financial tool with mobile access, advanced security, and 24/7 support, add the EarnIn app to your toolkit.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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