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With recessions happening every few years, it’s important to be as prepared as possible for the next one and as far in advance as possible. You don’t want to get caught off-guard and unprepared! So in this post, we will cover everything you could ever possibly need to know about recessions because I truly feel it’s an important topic for families.
In this post we will cover:
- How often do recessions occur?
- How long do they last?
- When was our last recession?
- What you need to know about the recession indicator
- Predicting the next recession
- How to prepare for a recession- 3 things you can do now to get ready
- How to recession-proof your finances- 4 ways you can build comfort for a slow economy
- Who benefits from a recession?
How often do recessions occur?
And how long do recessions last?
Using past records, we can see that recessions happen almost like clockwork. We have entered into a recession almost every 10 years since WW2. Each recession, on average, lasted about a year in length and took about 57 months to recover from.
Between 1919 and 1945, 6 recessions lasted on an average, 35 months to recover.
So while time is showing us that the physical recessions are lasting for shorter periods of time, they are increasing in the length in which it takes to recover from.
When was our last recession?
The National Bureau of Economic Research (NBER) reported that the last recession dates began in December of 2007 and ended June 2009, making it one of the longest recessions in recent memory.
After this America entered its longest stretch of growth, causing more and more economists to speculate that a recession is close, possibly before 2021.
The biggest fear maker is the recession indicator flashing red
The investment markets are something that is usually watched with a close eye to see how the economy is doing. Inside, there is a recession indicator that flashes red when the yield curve becomes flat-lined or inverted.
To simplify this imagery, picture an investment chart. That line is slowly rising up as the length of an investment grows, and the interest rates get better, putting more money in your pocket. This is a yield curve. It shows the connection between the interest rates and the term of the debt for a given borrower.
How this predicts the next recession
The yield curve is watched heavily as a recession indicator because without fail the last few times there has been a recession, there was an inverted yield curve. Meaning that the yield fell below short-term rates. Since 1956 there have been 6 peaks after the start of inversion, and within 7 to 24 months, the economy fell into a recession.
Recently (August 14, 2019), the range between a 2 year and 10 year yield fell to the negative range for the first time since 2007. If history repeats itself, that means that we can expect to see a recession within 7 to 24 months.
The effects of a recession range differently based on where you are financially within this economy. That being said, being prepared for the next recession in advance can help to keep your family afloat and living comfortably.
Disclosure for those not watching the markets: The next recession WON’T arrive within the next 7 months, FACT.
This, of course, doesn’t mean that it isn’t coming. But allow me to explain to you how you can know for a fact that it won’t be happening within the next 6/7 months.
In order for a recession to happen, there has to be a negative quarterly update twice in a row.
As of right now- August 2019, there has not been a single negative quarter for this year.
With the next quarterly update coming next month, predictions and analysis are showing that it will be positive as well (it could change, and I will update here if it does).
This means that we have a minimum of 2 quarters to wait before a recession is called. If the next quarter is positive, add another quarter to the waitlist and so on.
You can check the quarter updates by simply going to Google and typing in “GDP 2019 Q1, Q2, Q3, Q4” (whichever one you want to look at) and seeing if it has a positive growth or negative.
So for those in full-on panic mode right now, calm down and relax. Take this strategically and calmly. Nothing good ever comes from being in a panic.
Use this time to prepare for a recession but don’t cause yourself to worry so heavily about something that is still several long months away. As of right now, we are still in one of the longest growth periods this country has ever known. That’s good news!
How to prepare for a recession
With recessions come an increase in unemployment and a decrease in jobs, so unless you have one of the top “recession-proof jobs” you should look hard towards doing the following things to prepare yourself for any necessary cutbacks.
If you can manage to get a good financial footing now, you can be prepared and have a less difficult time later- that’s the biggest tip on how to survive the next recession!
Create an emergency fund
Having an emergency fund is incredibly important. If you’re a Dave Ramsey follower (like I am), you will often hear him talking about having an emergency fund. That’s because it is super important!
I personally keep a $1,000 emergency fund in an untouched savings account because I feel safe with that amount for the following reasons:
- It’s enough to cover our auto deductible in the event of a crash or emergency.
- It’s enough to cover most of our emergencies or at the very least, apply a hefty downpayment to let us work out a manageable payment plan.
After all of our debt is paid off, I will increase the savings to cover 6 months worth of our living expenses. My current debt payoff date is set for 2020- just a few more months until I’m debt-free!
Pay off your debt
With a recession in view, and the average American has a lot of debt, it’s unlikely that you can pay off all of it before the recession hits. While you should be trying to become debt-free, you should use this time before the recession to knock out as many of those debts as possible.
Dave Ramsey recommends the snowball method, where you start with the smallest debts first and work your way to the largest, giving you small milestone wins and accomplishments along the way.
The other method you could choose is an avalanche method. This is where you start with the largest debt or the highest interest rate and work your way down to the smallest.
Personally, If I was told that I had to knock out as many of my bills as possible within 7 months, I’d be looking at the smallest debts and then the ones taking the most money out of my paycheck every month.
For instance, if I had $200 owed on a credit card wanting $25 minimum per month, I’d pay it off in full because that’s an entire debt gone. If there was a debt that was $700 and wanted $150 a month, I’d pay it off too just because that would give me a much larger shovel to knock out the other debts.
Thinking things like this out may cause you to go a little out of order, but the more money you can free up monthly, the more you can use to pay off others and/or stash into savings.
By reducing your monthly expenses, you can give yourself a much better chance of surviving a recession if your income gets reduced.
Create additional income streams
With a recession comes the fear that you could lose your job. Sometimes this fear becomes a reality, and while your primary focus should be making yourself an invaluable member of your team, you should also look for additional ways to diversify your income.
This could include different side hustle ideas or a second job. Any form of passive income can be a great asset too.
Check out how I’m making over 3k from my couch this summer.
How to recession-proof your finances
Discuss your finances
Sit down with your spouse or family and discuss your finances. Figure out what you can do now and set realistic future goals and steps that you can make to achieve them. This is the perfect way to show that even during rough times, families can stick together and persevere.
Choosing to live more frugally can provide you with a lot of necessary skills that can help you not only throughout the duration of the recession but also last you throughout the rest of your life. Living beneath your means is a good way to reduce expenses and build savings.
Making effective meal plans and choosing to make frugal family meals can help enormously when it comes to trimming down the grocery budget. When you look at all of the different ways there are to save money, you can find some surprising ways to cut costs.
Continue to save money
During a recession, you shouldn’t stop any current investments. In fact, if you can manage it, you could benefit from throwing your money into the markets because the prices on stock often lower, making it a better investment.
If you save money for college, a 401k or other important contribution, continue to shove that money aside as per usual.
The exception to this is of course if you can’t afford it. Don’t do it.
You should put your family’s current needs way before these long term goals. There’s always time to adjust contributions later, but if contributing now means putting your family in debt or going hungry, it’s just not worth it.
If you have a side hustle business, don’t cut your prices
A lot of people make side hustle money thanks to the profit they earn from selling hand-crafted items. While you may feel the need to trim your prices to help bring customers in during the recession, you’re only hurting yourself by doing so.
You not only make it harder for customers to justify your prices after the recession is over, but you also have a loss of profits. Never sell yourself short, the right customers will pay what you are valued at, no matter what the economy is doing.
Keep in mind that not all of a recession fallout is bad, some benefit from a recession
While most of what happens in a recession is sadder in nature- negative economic growth, higher unemployment, lower wages, and the government borrows more money, some can look forward to the positives of a recession.
- Companies that are dealing with bankruptcy or debt problems.
- Another person who can benefit is a pawnbroker because people pay cash for goods.
- Second-hand stores, thrift stores and other places that sell discounted items
- While recessions can cause some companies to close, it can also produce new businesses.
- With the falling asset prices, it also makes the price of houses drop. While this might be bad for homeowners, it can be great for first-time homebuyers looking to save some money.
Stop being afraid of a recession
With recessions come depressions brought on by the fear and paranoia. These are usually amplified by the media and made to seem much scarier than they truly are. To avoid this depression, don’t let the fear control you. Because here’s a secret:
Most people aren’t directly affected by a recession.
So while it is good to be frugal, financially aware, and having a savings built up, it’s not the end of the world if you don’t. It may seem like things are bleak because the skies are gray and everyone stays shut-in their homes afraid to spend money or do anything outside the norm, but maintaining a somewhat normal (although slightly frugal) lifestyle can be a great way to power through a recession without being overcome with depression or a serious case of anxiety.
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