What is Recession and How to Rise from It?
Both financial crisis and recession are two terms that are dreaded by most of us. Plus, with the rising inflation around us nowadays, many of us are panicking even more.
Recessions are painful. The thought of being hit with a financial crisis can send anyone into a frenzy or keep people awake at night. Therefore, the importance of gaining knowledge in this area is a must for everyone.
In this article, we will explore the topic of recession and financial crisis and how to protect ourselves from them.
Table of Contents
What is a Recession?
There are various ways to figure out whether an economy is in recession. The most common factor is when economic activity shrinks for six months. Another way to recognize a recession is when the economy declines for 2 quarters consecutively.
The economic indicators that recession brings a drop in are usually:
- Retail sales
To understand recession, it’s important to learn about the concept of gross domestic product (GDP), too.
GDP is the monetary measure of the market value of all the final goods and services that a country produces within a specific period. “Real” GDP means that the consequences of inflation on that figure have been removed.
Most often, GDP is reported annually. But quarterly calculations also take place. During some quarters, the GDP can be negative. On the other hand, it can be positive in other quarters.
What Causes a Recession?
The truth is that the expansion and growth of a country’s economy cannot go on forever. A drop can happen and it does happen as evidenced by the current financial crisis.
What causes a recession is usually a combination of factors including:
- Loss of consumer confidence
- High interest rates
- Economic shocks
- Asset bubbles
What Does a Recession Mean for Our Money?
The impacts of a recession are painful. Many hardworking people end up losing jobs and struggle to pay their day-to-day bills. Even more sadly, some people end up losing their homes.
During a financial crisis, investors should be super careful. However, even during a recession, investing and trading provide a great avenue to grow your money long-term.
For most of us, recession comes down to what causes the downturn in the economy and how long it lasts. Recessions that occur due to financial crises tend to be the hardest to recover from. This is because companies and consumers have bad loans to get rid of their books.
Generally, though, recessions mean periods of unemployment and reduced spending. In essence, it presents us with an unhopeful outlook for our financial future.
How to Protect Yourself Against a Financial Crisis and Recession
Preparing for a recession should happen when times are stable. It should take place when the economic times are not as harsh and the finances still look hopeful.
This is very similar to what I usually advise about in terms of building an emergency fund. You need to plan well ahead so that when the time comes, you are good to go. The prospect of something beyond your control happening becomes a lot less threatening if you prepare properly.
With that said, here are a few ways you can deal with a financial crisis effectively.
What Happened During the 2008 Financial Crisis?
The 2008 financial crisis is called the Great Recession. It was the worst and deepest economic downturn that happened since the Great Depression.
This financial crisis was mainly a result of bubbles in real estate and complex investments called derivatives. Everyone from bankers to homeowners believed that the economy would keep on growing.
Resultantly, they made risky decisions like aggressive investments and taking on excessive debt. At the time, this seemed safe. But then the bubble burst.
This recession lasted 18 months but had an immense impact in the years that followed.
It had devastating effects on many people’s lives. Many employees with retirement plans saw their retirement savings evaporate.
Sadly, even when a recession is over, it doesn’t mean that the people affected by it are back to where they used to be.
Is Investing a Great Vehicle of Protection During a Recession?
Investing is a great source of staying afloat even during a recession. The best assets in a time of financial crisis are those that are not highly leveraged. This means that they don’t have a lot of debt compared to their assets.
You should choose to invest in companies where the business is not determined by the economy. For example, the healthcare industry is often recession-proof.
Further reading: Secrets to Protecting Your Money During Inflation
What is the Safest Investment During a Recession?
No stock is recession-proof. Choosing funds that track stock markets are a popular choice to invest in during a recession such as S&P 500 ETFs
The most known recession-proof assets during a recession include gold, silver, and cash, Other sectors that perform well in a recession are:
- Health care.
- Information technology.
- Real estate.
Index funds allow you to invest based on the long-term success of a global business rather than betting on individual companies. Also, take into consideration that these companies can go bankrupt at any time.
To Wrap Up – Recession and Financial Crisis
The recent pandemic caused inflation and the memory of the Great Recession is sure to make any of us worry about the term “recession.” But life will always be unpredictable, whether or not there’s a recession.
So, the best we can do is to be prepared and be careful with our money. In times of financial crisis, the right preparation matters exponentially.
Further reading: 22 Unique Ideas To Get Extra Money
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