Recessions amplify financial risks, threatening your economic stability. However, with the right preparation and smart decision-making, you can ride out economic downturns with minimal impact on your financial aspirations.
In hard economic times, certain financial undertakings spike in risk and should hence be sidestepped. Here are some of them.
Co-signing loans, even in flourishing times, is a gamble; if the borrower defaults, you are compelled to settle the balance. This risk inflates during recessions when both the borrower and the co-signer could lose employment or experience a dip in business income. Instead of co-signing, contemplate different strategies to support the borrower such as assisting in down payments, or making personal loans.
Home buying offers the option of an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. In a recession, interest rates typically drop initially and then increment as the economy rebounds, indicating that the ARM taken during a recession is eventually likely to elevate. Instead, a fixed-rate loan during recessionary periods may be more beneficial and less risky long-term.
With loan qualifications even more stringent during a recession, the probability of job loss, interest rates rising and subsequently excessive monthly payments becomes a harsh reality for many. Consequently, credit scores fall, resulting in difficulties in securing future loans.
Recessions can present opportunities to secure lower fixed rates on a mortgage refinance, but exercising caution before procuring new debt until economy shows recovery signs is paramount.
In booming economies, taking on new debt such as car loans, home equity lines of credit, and student loans is less risky. However, in a struggling economy, the risk of job loss or business failure rises, posing challenges to debt remittance. Hence, it's best to delay major purchases or pay cash when possible during recessions.
In periods of economic contraction, even mammoth corporations can feel the pinch and turn to cost-cutting measures. Instances from the technology sector from 2022 serve as a case in point- Facebook's parent company Meta Platforms Inc. (META) laid off 11,000 employees, and Amazon.com Inc. (AMZN) reduced its workforce by 10,000, the highest layoffs in their history. Hence, during recessions, job vulnerability increases and securing new employment becomes increasingly challenging.
For older individuals nearing retirement, economic downturns could palpably shrink retirement portfolios just when they start to depend on them. As a response, holding off retirement might prove useful. Similarly, for business owners, risky investments in the hopes of business expansion may not be advisable in a receding economy.
Investment projects requiring new debt are also discouraged in the initial recessionary phases; instead, wait for the early signs of economic recovery.
Maintaining your investment portfolio might prove beneficial in some cases, particularly if you have a longer investment horizon allowing your assets ample time to recover post-recession. Conversely, you could consider strategic investment shifts to lower risk assets like gold and U.S. Treasuries that often appreciate during a recession while high-yield bonds and most stocks tend to depreciate.
The key is to avoid panic but be prudent about expenditures and avoid unnecessary financial risks during an economic slowdown. Furthermore, adopting smart strategies like generating additional income when necessary, establishing an emergency fund, and sticking to a realistic budget can help you survive and thrive even in the thick of a crippling economic downturn.