The National Bureau of Economic Research (NBER) stated on June 8, 2020 that the COVID-19 crisis officially launched the U.S. economy into a recession. This announcement put an end to the longest economic expansion on record which lasted 128 months, or nearly 11 years, beginning in June 2009.
What exactly is a recession?
A recession is defined as two consecutive quarters of negative growth to real Gross Domestic Product (GDP), the total market value of goods and services a country produces. GDP is a combination of consumer spending, investment activity, government spending, and net exports.
During a recession, you can usually expect an increase in unemployment which we have seen with over 42 million people losing their jobs due to the COVID-19 pandemic. There may be a decline in asset prices such as home values or the value of stocks and bonds which we have also witnessed with the volatility in the US stock market.
Pressure put on companies may force wages down, impact prices, or even force them to go out of business. The government faces many challenges as well as government spending on programs like welfare and unemployment increase while government revenue decreases as they receive fewer tax dollars because individuals and companies are making less money. Thus, they are forced to borrow money by issuing bonds which usually have relatively lower yields than during times of expansion.
10 Considerations During a Recession
But what does all that mean for you? There are many things that are out of your control when it comes to the economic health of the nation but here are 10 considerations that you may find helpful during a recession:
- Reduce your discretionary spending. Basically put, spend less money on luxury items. I encourage you to revisit your budget to ensure you are being wise with where your money is going. As layoffs and wage decreases may occur during a recession, you may also have to find additional sources of income to supplement or replace your current income.
- Increase your savings. When looking at your budget, allocate more money to savings to give you even more cushion in your emergency fund. The money that was once being spent on those luxury items could be used to bolster your savings.
- Negotiate your bills and debt payments. As we’ve seen during the COVID-19 crisis, many companies have offered relief to their customers in the form of deferred or waived payments. Sometimes, a call or letter asking for the relief that you need is all it takes.
- Revisit your debt strategy. In an effort to save money, you may benefit from restructuring your debt. Perhaps consolidating or refinancing to a 0% loan or credit card for a specific timeframe will give you the cushion you need during this difficult time. Forbearance or deferment might also be options that are suitable for your particular situation.
- Purchase life insurance. There are many reasons to purchase life insurance, but one of the biggest reasons might be to help protect your family from losing their home if a loved one dies. Also, if you lose your job during a recession, you might find yourself turning to credit cards to cover everyday expenses. That debt can also be paid off with an appropriate insurance policy in the event of death of a covered loved one.
- Consider investing. As mentioned earlier, the value of assets and financial securities such as stocks and bonds may likely decrease during a recession. If you are lucky enough to have disposable cash on hand, investing that cash while markets are lower may benefit you in the long run if those assets return to pre-recession values or even higher.
- Diversify your investments. In other words, don’t put all your eggs in one basket. No investment is a guarantee so as a way to manage your risk, it may be wise to diversify your investments so that you are not overly exposed to a single security, property, or type of investment.
- Cross train your employees. If you’re a business owner, it may be wise to cross train your employees in the event that you have to lay people off. Losing people means loss of knowledge unless those who remain have been adequately trained in other departments/roles.
- Learn new skills. Continue to educate yourself and find ways to add value to employers or your customers by adapting to changes in the world. There are many online resources that are at your disposal if you wish to learn new skills.
- Prioritize your health. We are living through unprecedented times from many different perspectives which may be weighing heavy on you. Taking care of your physical, emotional, mental and spiritual health during times of crisis, tension, and recession are extremely important. Be intentional and prioritize your health.
Because many people forecasted a recession when the coronavirus outbreak first occurred, you may have already prioritized some of these considerations. In that case, keep it up! Recessions don’t last forever so your commitment to taking care of your finances now should bode well for you when all of this behind us.
When will the recession end?
If you’re wondering when the recession will be over, the answer is it’s too early to know. What I can tell you is that the average recession lasts about 11 months but there is no indication that this one will be shorter or longer than that.1
Stay the course and please reach out if you have any questions or concerns.
Reggie D. Ford, CPA is the Founder and President of Rosecrete Wealth Management. Rosecrete provides personalized, comprehensive financial services to affluent and high net worth clients. Rosecrete focuses on sports, legal, and medical industries with a passion for helping younger generations with early retirement planning.
For a list of states in which I am registered to conduct securities business, visit my website at www.rosecrete.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing includes risk including potential loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
1 - www.nber.org