- What Is A Recession?
- Official Recession Definition
- What Causes Recessions?
- Recessions and the Business Cycle
- What’s the Difference Between a Recession and a Depression?
- The Great Depression
- How Long Do Recessions Last?
- Can You Predict a Recession?
- How Does a Recession Affect Me?
- What Is A Recession? (And How Long Does One Last?)
- What to look for: the signals of a recession
- Yield curve
- Employment data
- Confidence level
- Leading Economic Index
- What causes a recession?
- Inflation/deflation cycle
- An asset bubble
- Loss of consumer confidence
- Slowing manufacturing
- What’s the impact of a recession?
- What’s the average length of a recession?
- What can I do to prepare for a recession?
- 1. Don’t panic, but be cautious
- 2. Have a back-up plan
- 3. Consider bolstering cash reserves
- What Is a Recession?
- Definition of an economic recession
- What happens during a recession?
- How long does a recession last?
- What's the difference between a recession and depression?
- What was the worst recession in history?
- The COVID-19 recession
- How a recession might affect you
- Do house prices drop during a recession?
- How to prepare for a recession
- How to ride out a recession
What Is A Recession?
Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
A recession is a significant decline in economic activity that lasts for months or even years.
Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy.
Official Recession Definition
During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of factors.
In 1974, economist Julius Shiskin came up with a few rules of thumb to define a recession: The most popular was two consecutive quarters of declining GDP. A healthy economy expands over time, so two quarters in a row of contracting output suggests there are serious underlying problems, according to Shiskin. This definition of a recession became a common standard over the years.
The National Bureau of Economic Research (NBER) is generally recognized as the authority that defines the starting and ending dates of U.S. recessions.
NBER has its own definition of what constitutes a recession, namely “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
The NBER’s definition is more flexible than Shiskin’s rule for determining what is a recession. For example, the coronavirus could potentially create a W-shaped recession, where the economy falls one quarter, starts to grow, then drops again in the future. This would not be a recession by Shiskin’s rules but could be under the NBER’s definition.
What Causes Recessions?
There is more than one way for a recession to get started, from a sudden economic shock to fallout from uncontrolled inflation. These phenomena are some of the main drivers of a recession:
- A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. In the 1970s, OPEC cut off the supply of oil to the U.S. without warning, causing a recession, not to mention endless lines at gas stations. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
- Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble in the mid-aughts that led to the Great Recession is a prime example of excessive debt causing a recession.
- Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance,” in describing the outsized gains in the stock market in the late 1990s. Irrational exuberance inflates stock market or real estate bubbles—and when the bubbles pop, panic selling can crash the market, causing a recession.
- Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.
- Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets hand, people and business stop spending, which undermines the economy. Central banks and economists have few tools to fix the underlying problems that cause deflation. Japan’s struggles with deflation throughout most of the 1990s caused a severe recession.
- Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, sparking recessions and hard times. Today, some economists worry that AI and robots could cause recessions by eliminating whole categories of jobs.
Recessions and the Business Cycle
The business cycle describes the way an economy alternates between periods of expansion and recessions. As an economic expansion begins, the economy sees healthy, sustainable growth. Over time, lenders make it easier and less expensive to borrow money, encouraging consumers and businesses to load up on debt. Irrational exuberance starts to overtake asset prices.
As the economic expansion ages, asset values rise more rapidly and debt loads become larger. At a certain point in the cycle, one of the phenomena from the list above derails the economic expansion. The shock bursts asset bubbles, crashes the stock market, and makes those large debt loads too expensive to maintain. As a result, growth contracts and the economy enters recession.
What’s the Difference Between a Recession and a Depression?
Recessions and depressions have similar causes, but the overall impact of a depression is much, much worse. There are greater job losses, higher unemployment and steeper declines in GDP. Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover.
Economists do not have a set definition or fixed measurements to show what counts as a depression. Suffice to say, all the impacts of a depression are deeper and last longer. In the past century, the U.S. has faced just one depression: The Great Depression.
The Great Depression
The Great Depression started in 1929 and lasted through 1933, although the economy didn’t really recover until World War II, nearly a decade later. During the Great Depression, unemployment rose to 25% and the GDP fell by 30%. It was the most unprecedented economic collapse in modern U.S. history.
By way of comparison, the Great Recession was the worst recession since the Great Depression. During the Great Recession, unemployment peaked around 10% and the recession officially lasted from December 2007 to June 2009, about a year and a half.
Some economists fear that the coronavirus recession could morph into a depression, depending how long it lasts. Unemployment hit 14.7% in May 2020, which is the worst level seen since the depths of the Great Recession.
How Long Do Recessions Last?
The NBER tracks the average length of U.S. recessions. According to NBER data, from 1945 to 2009, the average recession lasted 11 months. This is an improvement over earlier eras: From 1854 to 1919, the average recession lasted 21.6 months. Over the past 30 years, the U.S. has gone through three recessions:
- The Great Recession (December 2007 to June 2009): As mentioned, the Great Recession was caused in part by a bubble in the real estate market. The Great Recession wasn’t as severe as the Great Depression, its long duration and severe effects earned it a similar moniker. Lasting 18 months, the Great Recession was almost double the length of recent U.S. recessions.
- The Dot Com Recession (March 2001 to November 2001): At the turn of the millennium, the U.S. was facing several major economic problems, including fallout from the tech bubble crash and accounting scandals at companies Enron, capped off by the 9/11 terrorist attacks. Together these troubles drove a brief recession, from which the economy quickly bounced back.
- The Gulf War Recession (July 1990 to March 1991): At the start of the 1990s, the U.S. went through a short, eight-month recession, partly caused by spiking oil prices during the First Gulf War.
Can You Predict a Recession?
Given that economic forecasting is uncertain, predicting future recessions is far from easy. For example, COVID-19 appeared seemingly nowhere in early 2020, and within a few months the U.S.
economy had been all but closed down and millions of workers had lost their jobs. The NBER has officially declared a U.S. recession due to coronavirus, noting that the U.S.
economy fell into contraction starting in February 2020.
That being said, there are indicators of looming trouble. The following warning signs can give you more time to figure out how to prepare for a recession before it happens:
- An inverted yield curve: The yield curve is a graph that plots the market value—or the yield—of a range of U.S. government bonds, from notes with a term of four months to 30-year bonds. When the economy is functioning normally, yields should be higher on longer-term bonds. But when long-term yields are lower than short-term yields, it shows that investors are worried about a recession. This phenomenon is known as a yield curve inversion, and it has predicted past recessions.
- Declines in consumer confidence: Consumer spending is the main driver of the U.S. economy. If surveys show a sustained drop in consumer confidence, it could be a sign of impending trouble for the economy. When consumer confidence declines, that means people are telling survey takers they don’t feel confident spending money; if they follow through on their fears, lower spending slows down the economy.
- A drop in the Leading Economic Index (LEI): Published monthly by the Conference Board, the LEI strives to predict future economic trends. It looks at factors applications for unemployment insurance, new orders for manufacturing and stock market performance. If the LEI declines, trouble may be brewing in the economy.
- Sudden stock market declines: A large, sudden decline in stock markets could be a sign of a recession coming on, since investors sell off parts and sometimes all of their holdings in anticipation of an economic slowdown.
- Rising unemployment: It goes without saying that if people are losing their jobs, it’s a bad sign for the economy. Just a few months of steep job losses is a big warning of an imminent recession, even if the NBER hasn’t officially declared a recession yet.
How Does a Recession Affect Me?
You may lose your job during a recession, as unemployment levels rise. Not only are you more ly to lose your current job, it becomes much harder to find a job replacement since more people are work. People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.
Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement. Even worse, if you can’t pay your bills due to job loss, you may face the prospect of losing your home and other property.
Business owners make fewer sales during a recession, and may even be forced into bankruptcy. The government tries to support businesses during these tough times, with the PPP during the coronavirus crisis, but it’s hard to keep everyone afloat during a severe downturn.
With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans and other types of financing. You need a better credit score or a larger down payment to qualify for a loan that would be the case during more normal economic times.
Even if you plan ahead to prepare for a recession, it can be a frightening experience. If there’s any silver lining, it’s that recessions do not last forever. Even the Great Depression eventually ended, and when it did, it was followed by the arguably the strongest period of economic growth in U.S. history.
What Is A Recession? (And How Long Does One Last?)
While recessions are hard to quantify, typically economists peg a recession as two or more consecutive quarters of a negative growth rate of gross domestic product (GDP)—which is the total value of everything that the country produces, as assessed by the Bureau of Economic Analysis (BEA).
That can be an easy, measurable way to determine if you’re in a recession—which is why it’s a popular definition.
However, the National Bureau of Economic Research (NBER) chooses to be a bit less precise and more inclusive of various economic factors.
It defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production and wholesale-retail sales.”
This is what we began to see in March 2020, in large part as a result of the coronavirus outbreak.
What to look for: the signals of a recession
Here are some of the indicators that raise warning bells a recession might be imminent:
As mentioned, for some, this is “the” number, but it should just be one closely watched number among many as an indicator that the economy is wavering.
The “inverted yield curve” was the metric that threw everyone into a panic in 2019. It sounds very economist-y but a “yield” is just the interest rate on a bond.
Typically the yield curve slopes up, indicating that investors want a higher interest rate on bonds they are holding for a longer time.
But when it “inverts,” it indicates that investors are asking for a higher interest rate on shorter-term bonds, which means that they are feeling more confident about the long term than the short term. Historically, this inverted yield curve has come before a recession.
The Department of Labor publishes a monthly report on the job market, which summarizes factors such as how many jobs were created in each sector, what percentage of the population was unemployed and how many hours were worked, both full-time and part-time. This last part is important because when businesses are worried, they are more apt to hire part-time labor and are liable to cut hours.
In the wake of the coronovirus outbreak, thousands of businesses were forced to shut down, at least temporarily. Unemployment claims surged as a result, and economists predict that the March jobs report will reflect that.
While economics appears to be cold, hard math, it’s also influenced by how people are feeling. There are a number of organizations that take a pulse on current sentiment, including The Conference Board, University of Michigan and the National Federation of Independent Businesses. When consumers feel unsteady, they are apt to pull back their spending, which causes sales to fall.
Leading Economic Index
The Leading Economic Index, another report from The Conference Board, is comprised of 10 components that include jobs data, building permits, stock prices and manufacturer orders, among other factors, to indicate how healthy the economy is and how buoyant businesses feel.
What causes a recession?
While the signals cited above can set off those warning bells, they don’t actually cause a recession. It's often the following economic situations that can precipitate a recession:
When the cost of goods and services rise, this is known as “inflation.” These rising prices mean that consumers have to spend more of their money to buy the same things they did before, and can lead to spending cutbacks as they aim to stretch their budgets.
But then deflation can occur, which reduces the value of things and can cause consumers to wonder where the bottom is. They stop spending while they wait, which leads to a decrease in demand, which means companies need fewer people to produce their goods and services.
Fortunately, the Federal Reserve Board is on the job, tweaking interest rates in an effort to sustain equilibrium.
An asset bubble
What happens when you blow a bubble and it gets too big? It pops. All at once. That’s what can happen when consumers are too enthusiastically snapping up a certain item—such as real estate or stocks—expecting it to keep expanding, as in getting more valuable.
When it becomes clear that specific asset isn’t going to continue to rise in price, a huge sell-off can follow—think a stock market crash or plummet in the housing market.
The ripple effect is that the whole stock of that “item” is effectively devalued, which can send the economy into a recession.
Loss of consumer confidence
When consumers are worried about their economic future—their job seems uncertain or their investments have lost value—they tend to go into hibernation mode and stop spending. Of course, when consumers stop spending, businesses need to produce fewer goods and services. So they employ fewer people, making everyone feel less secure about their jobs. And the cycle continues.
One closely watched report is the Institute for Supply Management’s “Report on Business” that tracks elements such as new orders, production, inventory, supplier deliveries and prices. As mentioned above, keeping the machine of industry humming is a key factor of a healthy economy so it can be worrisome when things slow.
What’s the impact of a recession?
An economic downturn can be devastating for both business and personal lives, and of course, the two are intertwined.
Say a company makes widgets, and starts seeing its sales and profits decline. It will ly decide to make fewer widgets, which means it needs fewer employees running the assembly line and selling the widgets to stores. From there, the effects ripple to many tangential businesses adjacent to the primary widget-maker.
If they are manufacturing fewer widgets, they need less machinery, so it affects the machine makers and repair people. Retailers have fewer widgets on their shelves, so their sales decline.
And the widget-maker might decide that it doesn’t want to start a second line of widgets after all, so it stops investing in research, design and marketing.
The livelihoods of all those associated employees are then affected, which can shake their confidence. They, in turn, buy less of other companies’ widgets, and all the widget-makers are suddenly in the soup.
People are also less inclined to dine out, travel, upgrade their homes, etc. They might even stop paying their bills, causing even further distress for providers of goods and series. It’s easy to see how the cycle feeds on itself.
As everyone pulls back, a recession begins.
As this spending decline deepens, the stock market is ly to fall since companies are making and selling fewer widgets. Consumers might lose their jobs, or have their hours or wages reduced. At that point, they can have trouble paying their bills, which leads to credit troubles, and in extreme cases, bankruptcy.
We're seeing some of these effects already as a result of the coronavirus outbreak. Businesses are shutting down (some temporarily), millions of workers are being laid off from full-time work or losing contract work.
So they have less money to spend and may also have trouble covering their bills.
The government has been stepping in to try to mitigate the effects with a $2-trillion stimulus plan that would send cash payments to Americans, create a fund to lend to small businesses, and increase (and expand eligibility for) unemployment benefits.
What’s the average length of a recession?
The good news (if we can call it that) is that on average, a recession lasts about 11 months, says the NBER. But they can be shorter and milder, or longer and more severe, as we know from the Great Recession of 2008, or even catastrophic, the Great Depression of 1929.
But when considering history as a whole, we can assume the next recession will be of the milder and shorter variety.
What can I do to prepare for a recession?
Is a recession imminent? Well, we haven't experienced two quarters of economic contraction yet, but it certainly appears that we've entered recession territory. Indeed, Goldman Sachs, JPMorgan Chase, Bank of America and others say the U.S. is already in a recession and predict GDP will be down for the first and second quarters of this year.
So, what can you do? The best strategy is to maintain sound financial habits that you should adhere to all year long, such as carefully budgeting and watching spending, building an emergency fund and saving aggressively. (And if you don’t already do these things, there’s no time the present to start cultivating these habits!)
Here are three additional suggestions:
1. Don’t panic, but be cautious
This is the time to be more mindful than ever about your spending.
Focus on covering the essentials and look at what purchases you can put off or skip entirely, so that you can shore up your savings in case you do lose your income.
With travel on hold, and many bars and restaurants closed except for take-out, there are opportunities to trim spending in those categories. You can also save by buying key items— paper goods and pantry items—in bulk.
2. Have a back-up plan
What would happen if you lost your job? Do you have a skill that you could put to use in a side gig? And could you start using it today to improve your marketability and/or build up an extra cushion in your emergency fund? Being prepared is always the best antidote to a surprise job misfortune.
3. Consider bolstering cash reserves
In addition to bulking up your emergency fund, you might want to have an extra stash of cash on hand so that you don’t have to sell stocks when they're down or incur penalties by taking funds your retirement accounts to stay afloat if you hit rough water.
It’s natural to be fearful in the face of a recession. But taking steps now to safeguard your finances can help keep you on more solid financial footing.
Updated March 2020
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice.
This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
What Is a Recession?
There's a lot going on in the world. In addition to the coronavirus pandemic, we are currently in a recession. But what is a recession? Whether you have experienced several recessions in your life or this is your first, here's what to expect — and how to get through it.
If you are already facing financial difficulties, there's help available. Maybe your job or health has been impacted by COVID-19, or maybe you're struggling to make ends meet. Whatever your situation, check our coronavirus support resources for guides to applying for unemployment, asking creditors for payment leniency, and more.
Definition of an economic recession
A recession is a period of economic decline, signaled by an increase in unemployment, a drop in the stock market, and a dip in the housing market. An official recession is not declared until the total value of goods and services in the U.S. (called the Gross Domestic Product or GDP) has been in decline for two or more quarters (six months or more).
What happens during a recession?
a snowball growing larger as it rolls down a hill, a recession gathers power as one economic indicator after another gets caught up. Here's how that happens:
- GDP falls.
- Economic activity becomes shaky and companies cut back in an attempt to survive.
- These corporate cutbacks lead to layoffs and unemployment.
- Watching other people get laid off causes those who are still employed to worry that they are going to lose their jobs, which leads to less consumer spending.
- Government debt rises as it attempts to stabilize the economy.
- The Federal Reserve cuts interest rates in an attempt to stimulate growth.
- Stocks and other assets — homes — lose value, and a full-fledged financial crisis is underway.
How long does a recession last?
Although the Great Recession lasted for 18 months, it was unusual. If you take it the equation, the other 10 recessions since World War II have lasted between six and 16 months, or an average of 10.4 months.
It's important to note that the U.S. economy falls apart and rebuilds itself quite regularly. What set the Great Recession apart from other recessions was how long it took to rebuild.
The same may be true of the current recession.
What's the difference between a recession and depression?
For those asking, “what is a recession?,” it's important to know that a recession is not as severe as a depression.
A recession marks the contraction phase of a business cycle, when everything slows down for at least two quarters.
In contrast, as the Great Depression showed, depression is a prolonged period of economic downturn during which a significant decline in economic indicators occurs. In short, these two factors set a depression apart from a recession:
- Severity: When economic indicators contract (or weaken) for two quarters, it is considered a recession. A depression causes economic indicators to decline more significantly.
- Length: A depression is deeper and lasts longer than a recession. For example, the Great Depression of 1929 lasted 43 months, whereas the Great Recession lasted 18 months.
What was the worst recession in history?
Prior to the current recession, the Great Recession of 2007-2009 was considered the most severe. The IMF ranks it as the second-worst downturn of all time, behind only the Great Depression.
The Great Recession was fueled by the collapse of the U.S.
real estate market, which was caused by a subprime mortgage crisis (banks giving mortgages to people who were clearly unable to repay the debt).
the current financial crisis, the Great Recession was the “perfect storm” for a downturn. Subprime mortgages were the first snowball at the top of the hill. Homeowners who had gotten in over their heads began to default on their loans.
As defaults dotted the real estate market, home values plummeted. Even those who did keep up on their mortgages suddenly lost equity. The stock market quickly followed: Worried investors sold their stocks quickly. Next, banks collapsed.
Much of the world economy was sucked down with ours.
Part of the recovery process included new legislation designed to prevent the same kind of financial crisis from taking place again. While some experts warn that the Trump administration has rolled back or watered down some of these protective measures, a number of protections still stand.
It is safe to assume that once the final numbers are tallied, our current coronavirus-fed recession will take the place of the Great Recession as the worst recession of all time. There are several reasons for this, including:
- We've seen greatest number of unemployment claims since the Great Depression.
- It took only four weeks for COVID-19 to wipe out the total number of jobs created since 2009 and to send the unemployment rate soaring.
- There's still a lot of uncertainty. We don't know when there will be a vaccine, how many people will take advantage of it, whether millions of small businesses will reopen, or how long it will take for the majority of the unemployed to get back to work.
Economic research may try to predict how long the current economic recession will linger, and the central bank may try to stimulate the economy with changes to the federal funds rate. Nevertheless, economic downturns are felt at ground level by everyday people. It's tough to renew consumer confidence and return to normal, pre-recession spending levels.
The COVID-19 recession
While there are certainly lessons to be learned from previous recessions, there's also a big and obvious difference: None of those economic downturns were tied to a worldwide pandemic. So, what is a recession when it's tied to a once-in-a-lifetime medical emergency?
One important thing to understand about recessions is that they are a normal part of the economic cycle. The last major recession ended in 2009 and recovery began to take hold in mid-2011.
According to the National Bureau of Economic Research, the average expansion period lasts around 59 months, or just shy of five years.
This is why economists proclaimed we were overdue for a recession, even before the novel coronavirus hit.
In other words, we knew that the cyclical nature of business and economic growth would lead us into another recession. What we had no way of knowing was that it would coincide with a once-in-a-lifetime pandemic. That unfortunate combination has led to economic declines of near-historic proportions, including:
- Unemployment: More than 38 million Americans filed jobless claims during the nine-week period beginning March 12. That figure does not include many freelance and gig workers, who were unable to register unemployment claims, nor those whose income was reduced.
- Stock market: Dow Jones experienced a 2,997 point drop — the largest in its 123-year-old history — on March 16.
- GDP: On March 31, as businesses shuttered and millions of Americans were sheltering in place, economists from Goldman Sachs forecasted a 34% drop in GDP in the coming months.
- Consumer confidence: The Global Consumer Confidence Index surveys more than 17,500 adults under the age of 75 in 24 countries. The Global Consumer Confidence Index for June is 40.0, 8.7 points lower than it was in January, which is problematic. Consumer insecurity leads to less spending and slows the economy as a whole.
How a recession might affect you
What is a recession? It's a downturn in economic activity that impacts us all to some degree.
Even if our jobs are secure, it is ly that our retirement accounts will lose value and many of our homes will be worth less than they were prior to the recession.
As more people lose their jobs and unemployment grows, the number of bankruptcies and foreclosures will go up, meaning some of the homes around ours will stand empty.
One of the longest-lasting impacts of a recession may be emotional. A study published in Clinical Psychological Science found that people who suffered a job-related, housing-related, or financial hardship during the last recession were more ly to show signs of depression, anxiety, and drug use — years after the recession ended. Those without a safety net are particularly impacted.
Do house prices drop during a recession?
The short answer is yes, for most people, home prices will drop during a recession. In order to predict how much prices could dip, the real estate company Redfin researched changes in home values during the last recession.
They found average home values dropped 9% per year during the Great Recession, with single-family homes holding their value the best (losing an average of 8%). Townhomes lost 9.3% value per year, and condos lost 13.
1% during the same time.
One reason for the drop in home values involves consumer anxiety. The less secure buyers feel about their jobs, the less ly they are to pay top dollar for a home.
How to prepare for a recession
Because we know there will be recessions in the future, we have a chance to prepare. That's a positive. The following steps can help you weather an economic downturn:
- Build a budget. If you don't already have one, create a budget that takes your current situation into account.
- Fill youremergency fund. If you are still working, your top priority should be to build up three to six months' worth of living expenses. Whether you're working or not, consider adding a side hustle that could give you some extra cash during the crisis.
- Save that extra cash. These unprecedented times may also bring some unexpected savings. Put the money you might normally spend on dining out or entertainment straight into your savings account. If you have children at home, save any money you may not currently be paying to daycare.
- Bolster your skills. Even if you're working from home, explore ways to expand your education through free online courses. Anything “extra” you can add to your resume will help you stand out from the crowd in the employment pool.
How to ride out a recession
Someday, someone may ask you: “What is a recession?” Beyond letting them know about unemployment, lack of economic growth, what happens to the GDP, and how consumer spending is impacted, be sure to tell them that a recession is one of those events in life that we know will occur, and one that we can plan for.
There are things you can do to keep afloat and ride out the recession without losing too much ground. They include:
- Cut unnecessary expenses. For example, if you currently pay for the Cadillac of cable packages, cut it back to basic, switch to a less expensive streaming service, or get by with an antenna until the recession is over. Make more meals at home, consolidate high-interest debt into a lower-interest personal loan, stop smoking, shop for lower insurance premiums, grow a garden, reduce utility use, and find other ways to cut your budget for the time being.
- Pay down debt. If you are still employed and have an emergency fund in place, chip away at your debt. If you are unable to pay down your debt, at least try to shift your credit card debt to a 0% balance transfer card.
- Diversify your income. If you are unemployed, use this time to prepare for a new career by taking classes or applying for an internship.
- Continue to invest. The best way to make money with stocks is to buy and hold — through good times and bad. As the stock market begins to fall, people tend to panic, and investing can feel counterintuitive. But if you invest for the long term, you should keep investing when there's a potential recession. If you have enough in savings to see you through the short term, using these online stock brokers to buy stocks while the prices are depressed means your dollar will buy more. Once the recession is over, your portfolio will be healthier for it.
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