Point of Interest
Knowing the right and the wrong money moves to make during a recession can help you protect your finances and help you prepare to weather the financial storm.
An economic recession can be scary. The uncertainty of what’s happening and what is to come is, at times, overwhelming. However, there is hope of making it out of a recession while relatively unscathed, as long as you know how to survive.
Financially speaking, there are several different things you should and should not do in order to protect yourself from taking a massive financial hit. By being proactive, you can take control of your financial picture and alleviate some of the most common concerns.
What is a recession?
A recession is a term used to describe an economic downturn that is felt across the entire economy and is present for at least two financial quarters (several months). The coronavirus recession is the most recent example of this type of economic downturn.
Some of the effects and signals that you’ll be able to spot during a recession include the stock market dropping, unemployment rising, housing sales slowing and the country’s output slowing (gross domestic product).
While a negative showing in one of these areas of the economy is not ideal, it alone does not signal a recession. The effects must be felt across the entire economy to count as a recession based on expert definitions. The negative effects must also be felt for several months to be classified as a recession. Recessions are longer-term economic seasons, not short-lived fluctuations.
Money moves you should make
If you’re asking yourself, “Are we going into a recession?” — chances are you’re concerned about what money moves to make to counter the economic downturn you’re spotting on the horizon.
Taking control of your finances during a recession can lower your stress, restore feelings of control and save you money. But when should you look to make these money moves — before or during a recession? The answer is you should make them as soon as possible. The sooner you reach out and put these safeguards in place, the sooner you can start reaping the rewards of the relief.
- Negotiate with your creditors — Contrary to a lot of popular belief, your lenders do not want to see you default on your loans. If you’re worried about staying up on your payments, the first group you should reach out to is your creditors. Inform them of your situation and see what programs they may have available to help. Many lenders have ways to help resize your payments or even defer payments for a while. This can help you financially and protect your credit score for the long haul.
- Retool your budget — If there is a threat to your income, the first thing you want to do is adjust your spending to favor priority needs over luxuries and wants. Find areas where you can temporarily save by canceling unnecessary services, choosing less expensive options or postponing a purchase.
- Research relief programs — Your state and federal governments will have relief programs in place to help you during a recession, but in order to take part in these programs, you have to seek out the help. The government may try and push help in some scenarios, but ultimately it’s up to you to see what programs you may qualify for. Start with internet searches for programs available in your state or research what help is available federally. Generally, the sooner you reach out for help, the better. The worse the recession gets, the more bogged down these systems may get.
- Look for service discounts — Many service providers would much rather offer you a discount than lose you as a customer completely. Reach out to service providers and see if the companies have any options to offer you some relief and savings. For example, if you have car insurance and are not driving nearly as often, you may qualify for a low mileage discount. Remember, the worst a provider can ever say is no.
Money moves you shouldn’t make
Knowing what to do may not be as important as knowing what not to do. Before and during a recession, you may be thinking about making major financial moves out of fear. This likely isn’t the right move to make. Everything you do financially needs to be done from a rational place. All decisions should be well thought out, calculated and made with your long-term needs in mind.
- Take on unnecessary debt — It can be tempting to take on a bunch of additional debt to get through a recession if you don’t have adequate savings in place. While you may feel some short-term relief, you’re setting yourself up for problems later. The payments you owe on your newly acquired debt will continue long after the recession has ended.
- Withdraw a ton of cash — Fear may motivate you to withdraw a bunch of cash from the bank. Should you have some emergency cash available at all times? Yes — but there is no need to pull all of your money out of the bank and start storing it under your mattress. You’ll lose out on interest earnings and be more inclined to spend the readily available cash — plus you are taking a great security risk.
- Sell off all of your investments — The panic response to a recession is often selling off all of your investments to try and hoard cash and minimize losses. Any time you are making a financial move as emotional response, you’re making a mistake. Before you sell anything, assess the long-term implications of what you are doing. Will this investment recover? Do I have no other financial choice but to sell? Is this really the best long-term move?
The final word
We’ve seen several recessions of varying lengths and intensity throughout history. The one constant, though, is the economy has always recovered and come out stronger on the other side. Finding hope in this can help you to have the discipline and rational wherewithal to make the right money moves before and during a recession.
Remember, all of your decisions need to be rational, unemotional and well thought out. This might not make some of the decisions you’re forced to make any easier, but at least you’ll know you’re doing what is best for yourself and your family long term.