A recession is likely coming if it isn’t here already. But this shouldn’t be a cause for panic. While there may be a lot of hype in headlines, recessions are relatively common and may not last long. The average recession in the U.S. only lasted about ten months in the post-WWII era.
Of course, that doesn’t mean you shouldn’t prepare for a possible recession. If you’re worried about your financial security, there are some steps you can take to weather the storm. Chime is here to help you get in good financial shape so that you make it through a recession without too much stress.
What is a recession?
According to the National Bureau of Economic Research, a recession is a “significant decline in economic activity lasting more than a few months.”
How many months? According to Investopedia, an informal rule of thumb for a recession is a decrease in real GDP (gross domestic product) for at least two consecutive quarters. Simply put, the economy has to shrink for six months. A recession can be caused by low consumer confidence, economic shocks, natural disasters, and declining corporate profits.
The stock market is fluctuating, the global pandemic is still ongoing, and the tensions between Russia and Ukraine continue to escalate. These conditions lead to decreased consumer spending and investment, which causes our GDP to contract.
On July 28, 2022, The Bureau of Economic Analysis released the news that the United States GDP had decreased for the second quarter in a row, at an annual rate of 0.9%.
Though we don’t have a crystal ball to predict whether a full-blown recession will happen, preparing is essential.
What happens in a recession?
A recession is like a party crasher that shows up uninvited and refuses to leave – at least not for a while.
During a recession, there’s usually a decline in trade activities. Consumers spend less money, businesses make less revenue, employees lose their jobs, and the entire economy feels the effects.
In other words, a recession leads to a significant drop in spending by businesses and consumers, which leads to less production and fewer jobs. As consumer confidence wanes, real estate and investment values can also drop.
A severe recession undoubtedly can impact your finances. But there are ways to fight back. Take proactive steps to equip yourself better and avoid the worst of its effects.
How to prepare for a recession
Like the changing seasons, recessions are a natural part of the economic cycle. And just like you wouldn’t go outside in a blizzard without proper preparation, you shouldn’t face a recession without a game plan. Here are some actionable steps to prepare for a recession:
Take out a personal loan
Dealing with high-interest debt can be extra stressful when the economy is struggling. In the event of a recession, one of your top priorities should be repaying your debt to get your finances back on track.
One way to do this is to take out a personal loan to consolidate your high-interest debt. When you consolidate your debts, you can focus on paying off one loan instead of several. This strategy can help you get out of debt faster by saving on interest payments.
Bulk up your emergency savings
Financial experts recommend setting aside three to six months’ worth of living expenses for your emergency fund. It may seem like a lot, but remember, this is the safety net that can protect you if a recession happens. Start saving money now so you’re ready for whatever comes next.
Make a budget and see where you can cut back on unnecessary expenses. Then, set aside a fixed amount of money each month into a savings account. Once your emergency fund reaches a certain level, you can start investing the money instead of just letting it sit.
Building up your emergency fund doesn’t have to be daunting. Start small and make it a goal to add more each month.
To grow your money faster, save the change on every purchase with features like Round Ups1 when you open a High Yield Chime Savings Account. Before you know it, you’ll have a nice nest egg to help until the recession’s over.
Monetize your skills with side hustles
If you’re worried about how you’ll make ends meet during the recession, it’s time to start exploring some side hustles to grow your income. From freelancing to selling handmade goods, there are plenty of ways to earn extra cash.
One easy way to start raking in money is by freelancing. There are dozens of websites where you can find freelance work – such as Upwork or Fiverr – so take some time to explore your options. You can offer your services as a writer, editor, graphic designer, or web developer.
You could also consider selling your awesome creations online if you’re a whiz with a glue gun or have a knack for crafting. Etsy is a popular marketplace for handmade goods, and it’s easy to sign up. Just create a shop and start listing your products.
If you’re always on the hunt for good deals, you could become a reseller of second-hand goods. eBay is the perfect platform for this. With a little effort, you could soon be earning a decent profit.
And last but not least, if you have a few hours to spare each week, you could always take on a part-time job. From dog walking to language tutoring, there are plenty of low-effort ways to stack up your paper.
Don’t wait until the recession hits before looking for ways to make extra money. Get started now so you won’t have to panic when the time comes.
Upskill and future-proof your career
With a recession in the air, it’s natural to feel anxious about your job prospects. But there’s no need to panic! You can do plenty of things to future-proof your career and ensure you’re well-positioned to survive an economic downturn.
One of the best things you can do is upskill – invest in yourself and your career by learning new skills that will make you more employable. Take a close look at your skillset and identify any gaps. Then, consider how you can fill those gaps by taking on new assignments at work or taking courses outside of work.
Not only will this give you a competitive edge in job hunting, but it’ll also make you more valuable to your current employer.
Diversify your investments
As the old saying goes, don’t put all your eggs in one basket. This sage advice still holds when it comes to preparing for a recession. By diversifying your investments, you can minimize the impact of a downturn in the economy. Here are a few ideas for how to do that:
- Consider investing in both stocks and bonds. If the stock market takes a hit, you’ll still have some money invested in less volatile bonds.
- Don’t just invest in domestic companies. Supporting your local economy is admirable! But if you want to shelter yourself from the economic turmoil at home, it might be better to expand your portfolio to include foreign securities.
- Eliminate company-specific risks with funds. Investing in a mutual fund allows you to spread your risk over a wide range of companies and industries. Mutual funds can help protect you if one particular sector or company takes a hit during a recession.
There’s no guaranteed way to protect your investments against a recession. But by diversifying your assets, you can navigate the recession with more confidence and peace of mind.
Are we in a recession?
With so much uncertainty, it can be tough to know what to believe. Some analysts say we’re in for a long and difficult recession, while others insist it’s nothing more than a market hiccup. So, who’s right? To better grasp the situation, let’s look at what some experts have to say:
According to a CNBC survey, around 68% of Chief Financial Officers expect a recession to hit during the first few months of 2023. Even Fannie Mae, the Federal National Mortgage Association, argued that a recession is in the cards for the U.S. next year. Yet, some financial experts like Bill Adams, Comerica Bank’s chief economist, disagree. In an interview with Newsweek, he argues that the current economic conditions are not indicative of a recession, especially since the labor demand is still relatively high.
Of course, only time will tell how accurate their predictions are. And we might not have a definitive answer until long after the fact. In the meantime, all we can do is keep our fingers crossed and stay prepared.
Is a recession coming in 2022?
The jury is still out on whether a full-fledged recession is on the horizon. But it doesn’t hurt to prepare. After all, even if the economy only slows down to a small degree, that can still mean tough times for most of us.
While a recession can be tricky, it doesn’t have to be devastating. For example, economic slumps present an opportunity to invest in assets that will likely increase in value when the economy picks back up again. So don’t despair if the stock market drops or the housing market cools off.
By paying attention to the news, being proactive, and adapting your plans accordingly, you can navigate whatever comes your way in 2022 and the years beyond. Don’t sweat it if things look dicey for a while – even the darkest clouds have a silver lining.
What caused the 2008 recession?
A perfect storm of events contributed to the economic downturn in 2008, including the housing bubble bursting, the oil price shock, and the subprime mortgage crisis.
The housing bubble was the most significant factor in the recession. Home prices had been steadily rising for years, and people were taking out loans they couldn’t afford. When the housing market eventually crashed, many defaulted on their loans, and the value of their homes plummeted. This crash had a ripple effect throughout the economy, as businesses suffered and people lost their jobs.
By contrast, the causes of a potential recession in 2022 are different factors: a global pandemic, its resulting trade disruptions, and the war between Russia and Ukraine.
A recession may be looming. But remember that a recession is just a temporary economic slowdown, and, eventually, the clouds will clear.
Start taking action to prepare for the times ahead. Build your nest egg, diversify your investments, and consolidate your high-interest debt.
If you’re looking to take out a personal loan to tackle your debt, don’t let your credit score stop you from getting approved. Find out how to take out a personal loan with low or no credit.