As jobless claims in America climb past 30 million due to Coronavirus, the words “economic recession” are becoming more common in the news. But what exactly is a recession and how will it impact us? We’ll look at what economic experts are predicting and how you can prepare financially for the future.
In This Article
What is an Economic Recession?
Before you can prepare for an economic recession, it’s important to understand what a recession is. Motley Fool defines a recession as “a period of economic decline, signaled by an increase in unemployment, a drop in the stock market, and a dip in the housing market.”
While recessions are a normal part of our economic cycle, the U.S. has experienced 11 between 1945 and 2009, the Coronavirus recession we now face may be very different from previous experiences. According to Forbes, “Recessions are traditionally defined as two consecutive quarters of GDP contraction.” GDP stands for gross domestic product, or national output, while a quarter is typically defined as a three month period. During a recession, GDP includes a drop in personal income, industrial production, and retail sales.
But, this recession is different. There was no gradual decline over two quarters. The pandemic shut down the country almost immediately, forcing businesses to shut down and customers to stay home.
Gina Gopinath, Economic Counsellor and Director of the Research Department at the International Monetary Fund (IMF), calls this time “The Great Lockdown” and wrote, “The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.”
Economy Predictions: What to Expect
Because we are in uncharted territory, this economic recession isn’t easy to predict. In fact, right now economists cannot even agree whether we are already in one. However, the experts do agree that recovery will take a long time.
Despite the warnings of doom and gloom, there are many factors that could mitigate the recession’s impact like testing, vaccines, and how the economy reopens.
According to Liz Frazier at Forbes, this won’t be like The Great Depression or The Great Recession because we have more tools available, including the $2 trillion economic stimulus package that gives companies and individuals financial assistance.
4 Ways to Prepare Financially for a Recession.
While the economic outlook is in flux, it’s never too late to prepare your finances so you can weather the storm. Here are 4 ways you can start recession-proofing your finances.
1. Pay down debt.
Using the next few months to pay down debt, specifically high-interest debt, can be crucial for your financial wellness. While you may not get down to zero, prioritizing what debt to pay off can help give you the breathing room you need in your budget.
- Tackle by highest interest (debt avalanche)
- Pay off the lowest balance first (debt snowball)
- Consolidate your debt with a balance transfer card, personal loan or home equity line of credit (HELOC).
Once you get a handle on your credit card debt, you can start paying down other loans that have higher interest rates, like an auto loan.
2. Build an emergency fund.
As you pay down high interest debt, it’s important to also start building up your savings so you’ll have cash available for emergencies. For instance, if you’re able to consolidate your credit card debt, the financial cushion it creates monthly in your budget could go toward your savings.
It’s important to make sure whatever you set aside doesn’t create more debt or financial stress. Start out small if you have to – every bit helps. While most financial experts recommend your emergency fund has enough to cover three-to-six months of income, the answer really depends on your budget.
3. Live within your means.
Managing your money so you live within your means is easier said than done. Experts say living within your means you spend no more than 30% of your income on things like clothes, groceries and entertainment.
This is where making a budget comes in handy. Start by cataloging every expense – rent, mortgage, car payment, groceries, entertainment – so you have an understanding of exactly where your money is going. Take it a step further by tracking every dollar you spend weekly to identify where you can make a change. You may be surprised what you discover when you break your budget down like this.
4. Keep your credit score in check.
Good credit is always important to maintain, but it’s especially important during a recession. Your credit score impacts your ability to borrow money, obtain insurance, even get a job in some states. That’s why now is a good time to figure out where your credit score stands and clear up any blemishes on your credit report.
You’re legally entitled to one free credit report every 12 months from the three main credit bureaus – Equifax, Experian and TransUnion. You can access your report by visiting AnnualCreditReport.com.
If you need to dispute a problem on your report, here are the steps to take to correct any errors.
While it’s hard to predict what will happen over the next few months, it is possible to prepare financially for an economic recession. If you’re already struggling with debt from COVID-19, here are options available for financial assistance.