My boss shared a piece on recession he read online and I found it very enlightening. Considering the difficult economic climate we are currently facing, I feel it’s important I share excerpts from the post with you guys.
Lately my mantra has been ‘there is rice at home’. I can’t count how many times I have told myself this to prevent myself from spending recklessly. See, truth is economy don cast and we all need to save.
In case you are wondering what I mean by there is rice at home, I got it from a meme I saw on twitter which said – when you grow up and start making money for yourself, that’s when you understand why your parents always told you there is rice at home when you were a child.
The times are hard and we have to be smart, learn how to cut our expenses and manage our scarce resources.
What is economic recession?
An economic recession is simply defined as a significant decline in the economic activity spread across the economy that usually lasts more than a few months. More economically speaking, a recession is a decline in a country’s Gross Domestic Product or a negative real economic growth for two or more successive quarters in a year.
What happens during recession?
1. Rise of Unemployment rate
During a recession, there is a general trend of rising unemployment rates and decreasing overall output. With fewer people contributing to the economy, the overall economy is bound to be affected. Income growth would be stalled. While there would be more people in the market looking for employment, the demand for recruiting people is far lesser.
When people are earning lower incomes, their spending power decreases. As such, there is a reduction in spending. Businesses are limited in their ability to pass along any increases in expenses in the form of higher prices. In order to move goods off the shelves, businesses are more likely to reduce prices. This eventually causes deflation.
With prices drifting downward and commodities becoming more affordable, consumer spending will once again kick off and increase. The increase in consumer spending, over time
, leads to an increase in industrial production. This in turn improves corporate profits leading to increased employment and improved earnings, etc. This is how the economic cycle takes place.
People are generally conservative during recession. Those who lose their jobs because of recession start selling off their investments because they need money to sustain while they get another job. The increased number of people selling their stocks causes the stock market to fall sharply
3. Real Estate plummet
During a recession, people turn to fiscal conservatism. This affects the real estate industry as well, as there is lesser demand in the real estate market. People put off buying and selling of property during the periods of economic recession. Another scenario is where the increasing levels of unemployment during a recession cause affected homeowners to sell their home to accommodate changing job demands.
On the other hand, because of the higher supply of houses on sale as compared to the low demand, an economic recession will forcefully reduce the selling prices of homes. As such, the economic recession has a positive impact on potential homebuyers. This is also because there are lower mortgage rates that are caused by changes in interest rates.
How to prepare for recession?
1. Create a worst-case scenario
Create a worst-case cash flow forecast. Predict how bad it could be if you lost your job or if your business dropped in sales by about 50%.
2. Build up an Emergency fund
Prepare an emergency fund with enough money to cover at least 6 months of expenses.
3. Have a consistently rebalanced investment portfoli
This ensures that you lock the capital gain of certain asset classes when it is booming.
4. No matter what field of your profession, always strike to be the best
Always strive to be the best. Avoid becoming redundant or “fat” in your company. If you do not prove your worth, you will be the first to be led to the exit door during a recession.
5. Diversify your income source
Please beware if you are in a business that serves just 1-2 major customers. You will be at a great risk during a recession. For employees, work out some forms of alternative income besides the main employment.
6. Know your funding sources and manage the relationship properly
Another way to prepare yourself for a slowdown is to know your funding sources and manage the relationship properly. Remember, when funding sources tighten they do so selectively and this applies to their sources of business as well as the credits.
7. Learn to live on less than your income
You may see pay cuts in your job during an economic recession, so look now for ways to trim your budget as much as possible.
8. Last resort – compromise on your lifestyle
When everything doesn’t seem to work out for you, go for the last resort: try reducing your lifestyle dramatically. Sell that luxury car. Move to a smaller house. Cut down on expensive dining.
Cash is King
Cash is king during recession. It is only in your best financial interest to acquire assets (stocks, real estate) during a recession.
There is a possible recession looming. Some people will be harmed and subsequently, the economy will be blamed. They are probably right now maintaining the status quo and simply hoping it doesn’t happen.
Prepare now and you will find that you will not be affected very dramatically. This will leave you in a better edge. Preparation for a recession will enable you to react to changing times and take advantage of select opportunities.
This was copied and I felt I should share it, given the times we are in.