Monday, March 3, 2008

How To Survive a Recession

It is said that "A recession is when other people lose their jobs. A depression is when you lose your job."

With many predicting a recession in the US, the average consumer may be worrying how a recession might affect them and what they can do to insure against the negative effects of recession. These are some of the effects of recessions and how to deal with them.

More difficult To Borrow. In a recession banks are less willing to lend. This is particularly a problem at the moment, because of the concurrent credit crises which is reducing the availability of loans.
  • Solution: Avoid taking on any unnecessary debts. The debts you have try to reduce and consolidate into a lower interest rates bearing account.
  • On the positive side, in a recession interest rates are likely to be lower, meaning lower interest payments for mortgage holders.
Unemployment. This is the main concern over a recession. If output does fall, there is likely to be a fall in demand for labour. This problem is often concentrated in those sectors most affected by the recession. For example, in the current climate, jobs related to finance and the housing market are more at risk than say the manufacturing sector.
  • Solution: If you fear unemployment, start thinking what you might do as an alternative. Is it viable to consider working on a second income, such as online business.
  • Do you have unemployment insurance to cover mortgage payments. If not, it would be worth taking insurance out now.
  • Don't panic. Firstly, the unemployment may not occur; there is nothing to be gained by worrying over what we have no control other.
  • If are made unemployed, the best solution is to be flexible in looking for work. Consider new avenues and skills that you could learn. Also recessions will be short lived; a period of temporary unemployment does not have to become permanent.
Falling profitability of Business. If you are a small business owner the effects of a recession can be keenly felt. Lower profits could even threaten the survival of the business.
  • Solution: Look for ways to minimize costs without compromising the business. There are always ways to cut costs and increase inefficiency. Some economists even go so far as to say that recessions are a good thing because they force the economy to become more efficient.
  • If your business is particularly affected by the downturn, look to see whether you can diversify to reflect the changing economic environment. For example, if you specialise in selling luxury goods with a high margin try including some new product lines which appeal to people's desire for frugality.
  • A fall in profits is likely to be cyclical. therefore try to plan a financial plan to borrow at a low cost for the difficult years.
Falling Stock Market

In a recession, stock markets are likely to fall as lower profits reduce dividend payments. Try to diversify your investment portfolio. In a recession, commodities such as gold often do well. Even in a recession, there can be good investment opportunities.
Also bear in mind that stock markets can often be forward looking. For example, stock markets have fallen sharply since the start of the year in anticipation of a recession. When a recession comes, stock markets often don't fall any more.

Consumer Confidence

Often the worst aspect of a recession is the affect on consumer confidence and people's fear about the future. Bear in mind, the media often exaggerate the extent of a downturn in the economy. The media like to highlight sensationalist stories. However, it is often not as bad as it is made out to be. Keep a calm and detached attitude and just make the best of the current situation.

Any Benefits of a recession?
  • Lower interest rates. Good for borrowers
  • Lower inflation rates. Good for savers
  • Sometimes difficult times can force us to reevaluate our financial situation. It can make us look for new business avenues and new ways to cut costs and spending. Although it may be temporarily unpleasant, the important thing is not to panic but try to make the best of any situation we find ourselves in.
Can a Recession be a Good Thing?


e said...

Here is how to live without true worry. Be smarter than the shadow running the lie: DON'T OWN A HOUSE, VEHICLE, OR HAVE KIDS. Live in someone elses house and pay less rent with ALL utilities included and have EVERYTHING YOU WANT. Get a job in collections with a cell phone company. know that survivors benefits are forever and recession proof from soc security because they are connected to a veteran who has passed and remember what they did to me only causes me to BENEFIT in the end. I will have the last laugh on them! RECESSION PROOF!

Suzanne said...

Be careful, live within your means, sort out your debts and stop buying stuff!

And definately look into ways to earn extra income.

Financial planner perth said...

Save before you spend, don't buy things with money you don't really have, and cut your credit card. It doesn't matter how little or how much you have if you can manage your finances well.