Recession is a scary, but ordinary word.
According to the International Monetary Fund, any given economy is in a state of recession 10-12% of the time. Consider that within the context of 195 countries, each with its own economy. Recessions aren’t rare! What is rare, is knowing in advance, when one occurs.
What is a recession? The formal definition is two consecutive quarters of negative real Gross Domestic Product (GDP). But, when its raining, you don’t need someone to tell you “it’s raining”, just look out your window. A parallel can be drawn. The formal definition of a recession may not apply to your personal situation or the industry within which you are working.
What does the frequency of recessions mean for you? It’s not a matter of “if,” but “when” the next recession will occur. Knowledge allows you to make informed decisions, and recognizing this reality is an important first step towards preparing for it.
The BBC released an October 14, 2022 article, “Why Gen Z are right to be worried about money.” YES, there is much to be concerned about at the moment. Inflation, rising interest rates, an uncertain job market, financial insecurity and global conflict. Adversity comes in different, shapes, sizes and colors – but in some form, it is a constant companion on our life and our financial journey. Worrying is ok, doing nothing about it, is not.
Let’s look at 4-steps you can take today.
Build an emergency fund: Understand your essential costs, and begin to build an emergency fund that will cover 3, 6, then 9 months of living expenses. Don’t panic if you don’t have one. Big gains in your financial well-being don’t occur with a single step. They occur through the successful completion of many small steps. Take that first step, no matter how small.
Build your human capital: Make yourself less likely to get fired and more hirable in the event that you do. In a recession companies may lay off employees as sales slow and revenue drops. Take steps today, to maximize the likelihood of keeping your job when the economic environment does worsen. Examples include on the job training, pursuing professional certifications or higher education. In the event that you do experience the loss of your job, this step will still be of BIG value. Why? Because , no one can take away YOUR human capital. You are more qualified for that next job which you are now pursuing.
Build a financial plan: When something you want to own for a long time goes on sale – in the case of a recession, the stock market, the prudent thing is often to buy more. This is easier said than done when in the midst of difficult circumstances. Build a plan that recognizes recessions as a reality and write down what you will do when one occurs. For example, “I will cancel these three subscriptions and use that money to continue contributing to my Roth IRA.” This IS NOT the time to invest a little bit less to “try and time the bottom.” It IS the time to buy a little bit more each contribution period.
Get ahead and stay ahead: This financial approach isn’t talked about as often as it should be. Use good times or good fortune to get ahead financially. For example, record homes sales created a boom for realtors. Rising interest rates have made homes more expensive and now reversed that reality.
Own your financial future.