A big economic fear that has been on everyone’s minds in recent years is whether or not we will be entering a recession. What exactly does a recession entail and how will it affect you? More importantly, are there ways in which you can be better equipped to deal with one? Keep reading to find out.
What is a recession?
According to the Chartered Professional Accountants of Canada (CPA), a recession is described as “two financial quarters of decline in economic activity”. This economic activity is measured by a region’s Gross Domestic Product (GDP). There are many things that can contribute to a drop of a region’s GDP. Most notable, these factors include:
- High interest rates
- Reduction of consumer spending
- Reduction of government spending
- Reduction in capital investment (real estate and technological investments)
- Increased imports and decreased exports
- Rise in inflation
There are many theories as to how these factors come into being. Some believe it’s because of structural shifts in industries (like surges in oil prices), and some think a recession might be due to worldwide events like the Covid-19 epidemic. There is, however, no concrete defining factor.
How do recessions affect you?
Increase in prices
Recessions can affect everyone. A recession will increase the price of goods and services, and will also cause a rise in unemployment. Because of this, consumers will be less willing to spend their money as they usually would. Because consumers spend less, there is excess supply of goods, which leads to layoffs, which further lowers consumer spending.
Focus on necessities
During recessions, consumers will tend to focus all of their expenses into necessities. In terms of entertainment, consumers will tend to gravitate towards things that they can do at home — these are usually the least expensive options. Because of this, restaurants, retail stores, and the hospitality industry will feel the consequences of a recession more than other industries. Students and recent graduates will have a harder time finding a job, part-time or full-time.
More difficulties for the financially vulnerable
Recessions don’t affect everyone in the same way. Typically, those who are already financially vulnerable will feel the impacts of a recession more than those that are well-off. Moreover, those that have investments in stocks, real estate, or other assets might find themselves having a negative return on investment. Mortgages might be harder to pay off as many will find themselves falling behind on their payments.
Because recessions can cause a huge shift in the manner in which people lead their lives, they can also cause shifts in mental health. Luckily, there are things you can do before a recession hits that will help you survive the brunt of it.
What you can do to survive a recession
Analyze your finances and identify your priorities
One thing you should always do, even if you don’t fear a recession, is to analyze your financial situation. Take stock of every single penny that comes into your account as well as every single penny that leaves it. Next, keep track of all of your expenses and try to figure out which ones you could live without. Make a list of all of your necessities, and create a priorities list. Even though you might not feel as though you really need to cut back on expenses, if you feel a recession’s coming in the near future, you’re going to have to focus your energy on saving money before it hits. More specifically, you’re going to want to be saving cash.
Set some money aside
Because recessions typically last about two quarters, you should set enough aside to last for a duration of three to six months. This is a safety net in case you lose your job or have to face unexpected expenses.
If you don’t have three to six months’ worth of cash on hand, set that as a financial objective before a recession hits. To do this, you’re going to need to create a budget (or revisit an already-existing one). Focus on debt repayment if you can
Pay off your debts
If you have any debts, you should try to pay them off (or a big chunk of them off) before a recession hits. This way, you can ensure that your money is being spent on all of the things you need rather than on your debts. While prices are rising, the money you can spend on necessities will diminish. So you don’t want to make it harder for you to afford the things you need by putting a big portion of your paycheques on your debts.
Moreover, if you lose your employment during a recession, you won’t have any means of paying off your debts. This will lead to a decline in your credit score or your debts being sent to collection agencies. When you’re struggling financially, the very last thing you need is to be worrying about being harassed by debt collectors.
Get outside help
If you find yourself having trouble paying off your debts, contact your creditors as soon as possible. Let them know of your situation and see if you can come to some sort of payment agreement. The sooner you let your creditors know, the more likely they are to be lenient with you. If you cannot come to an agreement with your creditors, contact a licensed insolvency trustee. An LIT can help you reorganize your budget and find debt solutions that are perfect for your personal situation.
Have a backup plan in case of a layoff
Because recessions lead to a rise in unemployment, you should consider having a backup plan in case you experience a layoff. In order to do so, optmize and refresh your CV and try to increase your professional network. If you don’t already have a LinkedIn account, now is the perfect time to create one. LinkedIn is an easy and acessible way to make connections with potential employers and employees that work in the same field as you. Many recruiters also contact people via this professional network for job opportunities.
It could also be beneficial to acquire new skills. There are many online tools that will allow you to do so at a fairly low price. Udemy offers courses in a plethora of different fields like web development, SEO, data science, photoshop, and graphic design. These are powerful tools and skills that you can further develop on your own time. You would even be able to do some freelancing on the side if you’re looking for extra income.
Create and follow a budget
When facing precarious economic times, it’s of utmost importance that you create something that will make your own financial situation feel more stable. That’s where budgeting comes in. Budgeting helps you keep track of all of the money that comes in and out of your account.
First, you should track all of your income from all sources (job, benefits, side hustle, etc), and then track all of your expenses. If your expenses differ from month to month, consider looking at your past statements and making an average of all of your expenses in the last six months. This will give you a general idea of what you need to set aside each month. It’s also important that you try and see whether or not you can decrease your expenses, so that you may be able to set more money aside in savings.
If you have a lot of debts and are already struggling to make ends meet, contact a licensed insolvency trustee. A trustee will help you get rid of all of your financial burdens once and for all. Their goal is to ensure that you no longer have to deal with the stress that debts can cause. You’ll be given a fresh start.
