No one knows when the next recession will occur, but almost everyone can agree that it will happen eventually. Instead of worrying about it today, why not understand how a recession could impact you and begin to build a game plan so that you are best prepared for the next recession? I have you covered. I will outline the impact a recession could cause on employment, investments, home values, and most importantly how to build a game plan to prepare for the next recession.
How a Recession Impacts Your Employment
Loss of Income
The biggest threat to anyone during a recession is that you lose your most crucial resource, your income. Losing a job during a recession may lead to a longer unemployment time period because many companies are slow to hire or have hiring freezes. On top of the loss of income, becoming unemployed or terminated is also a psychological kick in the teeth.
No Bonus or Raises
Additional ways you may be impacted from an employment perspective is by a loss of bonuses and regular pay raises. This could extend for multiple years as your company waits for business growth to show a trend that it will continue. This is smart from a business standpoint and may help ensure that they do not have to have layoffs. In past recessions, some employers temporarily decreased employees salaries so that all employees could stay employed. In these scenarios, they felt that a portion of their income was better than 0% of their income or that one of their friends and coworkers would be let go.
Lastly, your career trajectory may be on pause. This happens due to not only hiring freezes but also because employees are less likely to jump to another employer in the midst of a recession. Internal employees are unable to move up and external employees stay at their current position. It is kind of like musical chairs, but no music is playing.
How a Recession Impacts Your Investments
Near or In Retirement
Investments in the stock market will likely be impacted significantly during a recession. If you are near or in retirement, you would be the most impacted by these potential losses. Withdrawing from your investments after they have lost a significant amount of value can permanently change your financial plan. At least if you are near retirement, you may have some flexibility to work a little longer than expected. It is significantly harder to go back to work once you have been out of the workforce and are retired. Finding a job during a recession is also not an easy task.
You can make mistakes at two different times with regards to your investments. First, not understanding how your investments could perform in both positive and negative market conditions before a recession occurs. A lack of understanding makes you unable to create a process in which you can be confident in during various market cycles. Second, freaking out and panicking during a recession. This leads to unnecessary stress and potentially permanent losses that may limit your potential to live your best life.
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Stock Market on Sale
If you are actively adding funds to your investments during a recession, then a recession may actually be a phenomenal occurrence. Assuming you do not make the first mistake mentioned above. This is great for you because you are essentially buying more shares than you normally would have been able to afford before the recession caused stock market losses. This is like a major sale occurring on items that you needed to purchase anyways and there is a strong possibility that if you hold your investments long-term they will be worth more. I don’t know about you, but I love when I find out there is a sale on something that I need to buy anyways. SCORE!
How a Recession Impacts Your Home Value
Own, Not Selling
This is not usually as big of a deal as people worry about. The biggest risk with homes occurs when you have a large mortgage payment, but then lose your income for an extended period of time. As long as you manage to keep your income stable during a recession, then it is really not a big deal if your home value does not go up or even falls. You still have a home to live in.
Own, Need to Sell
However, if you needed to sell the home, that is another story. Homebuyers are a bit scarce during a recession, which may mean that your home stays on the market. It is also possible that the value people are willing to pay may be lower than before the recession occurred.
If you find yourself confident in your employment situation during a recession and looking to purchase a home, your timing may not be any better. Home values would likely not be higher than before and interest rates tend to drop during a recession. This is not an argument for trying to time the market today because we are not actually in a recession and as I said in the opening, no one truly knows when the next one will come. It could be one year or it could be seven years. If it was seven years from now, it is quite possible that values and interest rates today could still be lower than seven years from now due to the potential increase in both value and interest rates between now and then.
Check out Should I Buy a House Strategy Guide!
Instead of worrying about any of the above scenarios, it is more impactful to acknowledge their possibility and focus on what you can control. This will help empower you to take control of your future and limit the impact a recession could have on you and your family. Below are a few ways to take action today so that you can be in the best position possible whenever a recession decides to make its chaotic appearance.
How to Prepare for a Recession
- Understand where you stand financially today.
- Establish and maintain an emergency fund with 6 months of living expenses.
- Be sure that any funding for short-term goals (less than three years away) are not invested in assets that could lose value.
- Develop skills that will make yourself a more valuable asset to your company. Consider pursuing additional education/certifications related to your desired field of work.
- Strengthen your current relationships, which is your natural network. This could help you maintain your current position or be referred to another opportunity.
- If you have a significant other, it is vital that you talk with each other both before and during times of crisis. This allows you to have an understanding of what is most important to each of you and prioritize these goals. You will be able to focus on the most important aspect of your family’s plan.