How does a recession affect me?

Key points to remember

  • The harsh reality is that a recession will impact everyone in one way or another. We are all noticing the impact of inflation on the price of basic consumer goods and already the rise in interest rates.
  • During a recession, unemployment rates rise because businesses begin to downsize in order to meet the challenges of lower consumer spending.
  • If your investments are long-term, go beyond them and stick to the basics of personal finance outlined below.

Are we officially in a recession? No. This economic cycle has not yet been called an official recession. You could say it’s a stagnant economy and a recession is looming. Some pundits have turned to the traditional definition of a recession – a period with two consecutive quarters of negative GDP growth. Others are quick to point out that the labor market does not behave like that of an economy in recession. Either way, you need to be prepared for the possibility of a recession, even if it hasn’t fully materialized.

Just in case, most people: how does a recession affect me?

A recession affects everyone

The harsh reality is that a recession will impact everyone in one way or another. We all notice the impact of inflation — rising prices for basic consumer goods and rising interest rates. Your investment portfolios have also likely been affected by inflation and the threat of a recession. You may also have heard of companies cutting spending as they prepare for lower consumer spending.

How will a recession affect you personally?

During a recession, unemployment rates rise because businesses begin to downsize in order to meet the challenges of lower consumer spending. The job market is getting bleak – there are fewer hirings, more layoffs, and fewer financial incentives offered to current employees, like bonuses and raises. Many hardworking people will find themselves out of work through no fault of their own.

You will also experience volatility with your investment portfolios. As we have all witnessed in 2022, the stock market reacts strongly to economic news and global conflicts. If you need to liquidate stocks to get cash for a big purchase, like a wedding or a down payment on a house, you may have to choose between selling at a loss or postponing the purchase. If you can, start thinking about putting off any major expenses, as it’s important to keep money in your savings account during a recession to protect yourself financially.

Although a recession is not pleasant, there are ways to soften the blow. As unpleasant as it is, a recession is a natural part of the business cycle, and it won’t last forever. It’s a critical time to take a step back and focus on the basics of personal finance: budgeting, paying off debt, saving for retirement, and more.

How a recession affects bank accounts

Interest rates will fluctuate depending on what needs to be done by the Federal Reserve to move the economy accordingly. As a result of these movements, you will see many fluctuations in interest rates provided by banks.

Banks also accept that even in the best of times there will be people who default. During a recession, we may see an increase in foreclosures. Banks will be less likely to lend money to potential borrowers looking for a mortgage or personal loan. It may not be as easy to get a mortgage during a recession as it used to be, as banks will be stricter with the approval process.

The good news is that if you keep your money in a savings account with your bank, you may see a slight increase in your return, as the Fed often raises interest rates to combat high inflation. When the Fed raises rates, banks usually follow suit and raise theirs to attract more customers, which creates more cash flow.

However, it is unclear how long a recession could last and what kind of interest rate changes will occur to stimulate the economy in the meantime.

But as long as your bank is federally insured, you can rest easy knowing your money is safe in your bank account. FDIC insurance protects your savings up to $250,000 in individual bank accounts, so you don’t have to worry about a recession wiping out your bank account.

How a Recession Affects Credit Cards

A recession affects credit cards in different ways. Credit card interest rates are high compared to other types of debt, and maintaining a balance can be stressful for many people during good times. During a recession, people may lose their jobs or experience other financial setbacks that lead them to rely on credit cards to get by. In the worst case, people are unable to make their minimum payments on their credit cards and have to declare bankruptcy.

Other people who have a balance on their card may see an increase in their monthly minimum payment as interest rates may rise. If you are one of these people, it means that your debt repayment plan could be changed without you being responsible. You could end up with higher debt repayments and less income.

Since credit cards are unsecured debt, some people will default on their credit cards during uncertain times. Credit card companies react to this by raising interest rates to limit losses and increase revenue to cover these expenses. These changes protect the profits of credit card companies, but they end up hurting anyone who needs to carry a balance.

It is recommended that you protect your finances against the recession by focusing on paying off credit card debt and building up an emergency fund so you are prepared for whatever comes with the crisis. economy. You don’t want to be blindsided by a job loss or increased debt repayment.

How a recession affects stocks

How does the recession affect the stock market? If you’ve checked your brokerage accounts at any time in the past few months, you already have an idea of ​​the answer here.

Stock prices typically drop drastically during a recession. The S&P 500’s worst decline in our lifetimes occurred during the last recession in 2009, when the index fell 55% from its peak in March 2009. Once companies start reporting higher earnings weak, stocks will fall as investors react instantly to any bad news.

Many investors will pull their money out of the stock market when they hear rumors of a recession or even high inflation rates. People want money and security, so they start selling their stocks. This leads to a sell-off when stock prices fall. This therefore means that even companies in excellent financial condition will also see their shares fall. Your stock portfolio will drop and you will feel pain when you see everything in the red.

Then, to make matters worse, investors will continue to react quickly to any type of news, good or bad, leading to extreme swings and market volatility for an extended period of time.

A recession will cause many people to lose money in the stock market due to panic or the harsh reality that businesses will decline or even go bankrupt as consumer spending drops sharply. This is why many experts will encourage you to balance your portfolio and focus on the long term because in the short term almost everything collapses in a recession.

How a recession affects bonds

While bonds are considered a boring investment during a bull market, when a recession hits, people are more fond of bonds because they prefer to invest in something less risky. Bond stability and regular interest payments help investors feel comfortable with bonds.

Stocks will experience high volatility during a recession. Even financially stable companies will see their shares lose value. Bonds are considered a safe haven for many investors because stocks carry more risk than bonds. In times of uncertainty, people turn to the fixed income guarantee of a bond instead of hoping for a capital gain with a stock.

Conclusion…

There is nothing pleasant about going through a recession. Unfortunately, this is part of the economic cycle and we will encounter multiple recessions in our lifetime. What is our best advice for weathering a recession? If your investments are long-term, limit them and stick to the basics of personal finance. You can prepare for a recession by focusing on paying off your credit card debt, building up your savings, and controlling your emotions. You don’t want to react emotionally to a downturn by making rash decisions like selling your stocks when they’re down.

During a recession, many financial risks will also increase as businesses suffer, and the risk of default will increase. You need to have a balanced portfolio to protect yourself in the event of an economic downturn.​​

To that end, take a look at Q.ai inflation kit with your money to invest for the long term and continue to make smart, unemotional decisions with your portfolio. You can also activate Wallet Protection at all times to protect your winnings and reduce your losses.

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