Surviving a Recession
Last updated 25th Apr 2022
- Last Updated: Friday, 16 October 2020
Unemployment RatesAs the economy contracts, consumers begin spending less money on goods and services. As corporate revenues begin to decrease, there is downward pressure on corporate earnings. In an effort to increase profitability, companies begin to cut expenses, including their labor costs. This means there is a direct correlation between recessions and a decrease in wages, whether this is through the loss of a job or a reduction in overtime. Information obtained from the Bureau of Labor Statistics, provides a good illustration of the effect recent recessions had on unemployment rates:
|Timeframe||Peak Unemployment Rate|
|2007 - 2009||10.0% (October 2009)|
|2001 – 2003||6.3% (June 2003)|
|1990 – 1991||7.8% (June 1992)|
|1980 – 1982||10.8% (December 1982)|
Preparing for RecessionsThe challenge of surviving typically involves both understanding what to expect, as well as being prepared for the worst. The loss of a job lowers household income, but a recession is usually accompanied by a drop in the price of stocks too. This means an economic slump will not only lower income, but also the value of investments. An individual that loses their job will need another source of income to pay their monthly bills. Investors know that selling stocks at the tail end of a bear market is a losing proposition. (Remember, economic downturns and bear markets often coincide.) So the worst-case scenario for anyone hit hard by a recession is this:
- They've lost their job
- They're selling their stocks at bargain (low) prices
Start Saving MoneyThis first tip is the most important piece of advice that can be offered: start saving money now. Follow the philosophy of "paying yourself first," or there will never be enough cash to make it through a recession without going further into debt. When figuring out how much cash is needed, the rule of thumb would be to have enough money saved to pay for at least six months of expenses. Individuals that have created a budget before should understand how much money is required to pay their monthly bills. Throughout this website there are articles on building a budget, as well as online calculators. These tools can help individuals to better understand how much money they spend each month.
Refinance a MortgageIn an effort to stimulate the economy, the Federal Reserve will often reduce interest rates. By doing so, the federal government hopes that by making money less expensive to borrow, companies will begin to expand their operations once again through long-term capital investments. That's good news for companies when they're struggling, and that's good news for individuals too. The coincidence of lower interest rates and the ability to extend the timeframe over which a mortgage is paid off is a tempting combination. Anyone that's struggling to make ends meet, or would like to save more money each month, might want to consider refinancing their existing mortgage. This doesn't mean a recession is a good opportunity to increase the home's debt load. The idea is to reconstruct an existing mortgage, and spread out the new payments over a longer timeline. There are plenty of mortgage calculators on this website that can provide insights into how much money can be saved each month by refinancing. The idea is to use the money saved each month to start building a "recession" fund.
Borrowing against RetirementFinally, it's never a good idea to borrow money from a 401(k) plan, to pay for expenses today. However, if the decision is between losing a home and borrowing money from a retirement fund, the choice is clear. Each plan may have slightly different rules, but the IRS allows for 401(k) hardship withdrawals under certain conditions, including:
- Money used to pay certain medical expenses for the accountholder, their spouse, or any dependents.
- Payments of specific post-secondary education expense for the next year for the accountholder, their spouse, or any dependents.
- The purchase of a primary residence.
- Money needed to prevent eviction or foreclosure on a primary residence.
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