Can My Economy Crash? (And What Can I Do About It?)

 

Can My Economy Crash? (And What Can I Do About It?)

History of Crashes

Humans have been witness to many civilization collapses over the last 10,000 years or so.  Once thriving and powerful economies are now experienced only through history books or crumbling architecture.  Ancient Rome, Greece and Egypt. The Incan, Mayan and Aztec empires.  All collapsed. 

These collapses all stick out because of their severity.  Luckily, they do not happen very often. 

What has happened more often historically, are economic depression and especially economic recessions.  The last depression in the United States was The Great Depression that started in 1929.  We have had several recessions in recent memory including one in the early 2000’s, the Great Recession beginning in 2007, the recent pandemic-related recession and now the recession of 2022.

Recessions are a normal part of the boom-and-bust economic cycle. 

What is a recession?

The National Bureau of Economic Research is officially charged with designating when a recession has occurred.  Their definition is this: “The NBER's traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee's view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.” ^[1] Kind of nebulous wouldn’t you agree?

Many people define a recession as two consecutive quarters of declining gross domestic product (GDP).  This happened in the first two quarters of 2022.  ^[2]

 

 Indicators of a recession

A recession can be signaled by an economy slowdown or a short-lived economic crisis. A number of factors need to be in place before you will know for certain that a recession is imminent, but here are some potential signs that your economy may soon go into decline:

(1) Economic growth slows down below what is necessary to keep up with a healthy job 
                   market

(2) Economic indicators like high unemployment and low consumer confidence point toward                     a weak overall outlook

(3) The stock market takes a steep dip, often on fears of further economic downturns

(4) High levels of government debt

(5) Rapid inflation or deflation

(6) Asset bubbles

Are any of these happening right now?

How to prepare (Build Your Shield)

Preparing for a recession doesn't mean you need to board up the windows and get ready for the apocalypse. The key to succeeding in a recession is being prepared. Here are some things you can do before it happens:

 ·       Create an emergency fund so that you have money saved up for any unexpected expenses

 ·       Put money aside and make a plan of what assets you might buy at a discount

 ·       Pay off any debt you may have and make sure there's enough cash on hand so that if your income             dries up, you can still cover your bills (focus on high interest accounts first as rates are likely to             increase)

 ·       Cultivate additional sources of revenue

 ·       Identify expenses that you can cut and assess your budget overall

 ·       Find a hobby that saves or makes you money

 ·       Set yourself up to earn passive income

 ·       Network with people in your field

 ·       Keep your resume up to date and be indispensable at work

 ·       Consider bonds or other assets that hold their value during a recession

 ·       Increase your credit score

 ·       Stock up on food items that have a long shelf life

 ·       Have a side hustle up and running that you could leverage if needed

 ·       Invest in yourself

 ·       Take responsibility that you are the one who can do something positive

 ·       Lower your utility bills

 ·       At work be a superhero

 ·       Find joy in being self-sufficient

 ·       Make a plan of what you would need to do in a recession and then try that plan out for two                     consecutive months

 Here are some things you can do as a recession is happening:

·         Try to keep up your investment contributions.  This could benefit you in the long run.  Don’t try to          time the market.

·       Keep learning.  There are lots of great (and free) training and certificate programs you can level up          your marketability with.

·       Consult a financial advisor.  You do not want to make financial decisions out of fear.

·       Find buying opportunities that make sense.  You don’t need to be afraid of a bear market.

·       Downsize your lifestyle some to give your budget a little breathing room

·       Keep your insurance up to date (even pet insurance)

·       Exercise, eat right and take care of your health

·       Talk to a trusted friend, relative or health professional

·       Delay those nice-to-have purchases

·       Avoid taking on more debt

·       Especially don’t acquire new debt that could adjust higher in a rising interest rate market

·       Be prepared to pivot to a new career or field

·       Practice gratitude and seeing the positives in things

Recessions do not last forever.  You can start preparing now and your financial life will benefit even if a recession doesn’t happen.  This could be the opportunity that will put you way ahead of where you were.

Taking Action

This post is all about giving you useful information.  Info is great but it doesn’t help you that much if you don’t do anything with it.  You have the opportunity to take action right now.  Why not solve some of your problems right now?

Do you know two or three people that could benefit from this post?  Please share and let them know that you care.

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Citations:

[1] Business Cycle Dating Procedure: Frequently Asked Questions. National Bureau of Economic Research. 11/13/2022. https://www.nber.org/research/business-cycle-dating/business-cycle-dating-procedure-frequently-asked-questions

[2] Daniel Fernandez. The United States Enters a Recession. 8/19/2022.  Universidad Francisco Marroquin. https://trends.ufm.edu/en/article/united-states-recession/  Sub cite: Graph produced by the author with data from the St. Louis Federal Reserve.