Worried that inflation means we’re headed for a depression? Starting to feel the pain of rising prices thanks to inflation?
While we are officially still in a recession as of June, 2021, and economists believe the economy will not likely turn around anytime soon. The higher prices for housing and consumer goods that come with inflation mean people spend less, so businesses make less, and then hire fewer workers and higher unemployment rates — which leads to an economic downturn, even a depression.
This post will help you prepare for a higher chance of unemployment, investment losses and general financial instability, help you if you are living paycheck-to-paycheck, and have trouble paying your bills.
- First: What is a recession?
- Best way to prepare for a recession
- How to make money in a recession
- How to survive a recession
First: What is a recession?
A recession is a downturn in the economy. On a broader scale, this means that businesses lose money and industry produces less product for two quarters — or six months — in a row.
What does a recession mean for everyday people? Recessions are typically marked by higher unemployment rate, wages that do not go up, decreased housing prices, and downturn in stock market equities and other investments.
Best way to prepare for a recession
- Create a financial plan now. Read: How to get your financial act together in 2021 and beyond
- Live frugally always: How to create a budget you’ll stick to
- Have a nice savings cushion: Start an emergency fund
Do not sell when (not if!) the stock market tanks: How to get started investing
Are we in a recession today?
The National Bureau of Economic Research Business Cycle Dating Committee announced that the 128-month expansion (the longest in U.S. economic history) ended in February 2020.
Is a recession coming?
While economists around the world have been predicting a recession for several years (historically, the economy dips about every 10 years), the virus outbreak and related global stock market plummets have experts confirming recessions in the United States and around the globe happening in 2020 and into 2021.
On March 12, 2020, leading economists warned that stock market plunges were the beginning of long-term economic recession.
“We are going into a global recession. The economic damage is going to last.”
Mohamed Aly El-Erian, chief economic adviser at Allianz, the corporate parent of PIMCO where he served as CEO. CNBC
Reuters News even suggested we may be headed for a depression.
With a strong stock market and improving employment conditions the verdict is out whether the economy is now out of the recession, or there is more bad news on the near horizon for 2021. However, economists agree that a full financial recovery from the pandemic will take years — or more.
What happens during a recession?
In general, during a recession there is less economic activity. Typically, the financial pinch follows the following flow when the stock market tanks and home prices dip:
- Businesses cut back spending in an effort to increase or maintain profits.
- Hiring stops or slows, raises and bonuses are tightened.
- Individuals, worried about their jobs and investments, spend less on everything from food, to new homes and cars, and discretionary items like travel, gifts, home furnishings, electronics and clothing.
- Governments have less tax revenue to invest in their communities.
- The stock market, government debt, and home prices all continue to suffer under these economic pressures.
A depression is a severe and prolonged downturn in economic activity, typically defined as lasting three or more years and/or a decline in real gross domestic product (GDP) of at least 10%.
An economic depression is characterized by:
- High unemployment rate
- Low inflation — or even deflation (when the price of items goes down)
- Bear market for stock market
- Credit defaults for individuals, companies and governments
- Less available credit
- The affluent tend to save more during a depression
Positive effects of a recession
A recession is part of a natural, healthy cycle of an economy. Some human behavior shows improvement, including:
- People tend to save more money during a recession.
- People shop less during a recession — which is good for the environment.
- Interest rates are cut, which is great if you need to borrow money, including for a mortgage.
- Floundering businesses close, which means that stronger businesses are more likely to thrive.
- There are many financial opportunities from lower prices overall — including the opportunity to buy stocks, real estate and businesses at discounted prices.
How to take advantage of a recession
Rich people love recessions since they are great opportunities to buy low and sell high, take advantage of a stressed job market and otherwise make coin. Here is what you can do:
How to make a profit in a recession: What sells best during a recession?
Buy low, sell high — investing 101. Whether you are in the market to buy a house, or have cash to invest in the stock market, a recession is an excellent opportunity to buy now, and profit later. The key is to hold on to your investment until the market improves.
Kiplinger recommends these stocks during a recession:
- Dollar General
- Lockheed Martin
- O'Reilly Automotive
- Philips Morris
- Church & Dwight
- General Mills
- Proctor & Gamble
- Service Corp. International
- H&R Block
How to make money in a recession
1. Buy stocks during a recession.
Most investors get scared when the stock market goes down, and quickly sell. This is 100% the worst thing to do. If you have investments in the market, sit tight. If you have cash on hand, invest now that stocks are at a discount, and profit when the market returns.
Learn about investing in a 401(k), IRA, through a robo-advisor or brokerage: How to get started investing for women.
2. Buy up real estate during a recession.
When the economy is down, home prices drop, and interest rates also go down. This is a great opportunity to buy up real estate — whether for your primary residence, a second, vacation home, rental investment or an Airbnb property.
3. Sell gold during a recession.
Gold prices have historically risen during recessions. Gold has been considered a safe investment, and often climbs when stock markets fall. If you have old gold jewelry, gold coins or other gold items that you no longer enjoy, consider selling them for cash.
Interested in buying gold for an investment?
4. Home-based recession-proof businesses
Whether you are homebound because of a virus outbreak, out of work because of the economy, or simply looking for a second income stream and/or better quality of life, look for a side gig or full-time job that you can do remotely, from home.
Thankfully, these positions are growing in availability, as businesses appreciate that quality talent might be located far from their headquarters, and it saves companies the cost of renting office space — though nothing is recession-proof, of course.
Industries that tend to be resistant to a recession:
- Big box stores like Walmart and Target tend to be strong, as people seek out discounts
- Scientific research projects tend to be solid, as they are rooted in long-term academic projects. Clinical research coordinators often work from home.
- Doctors and dentists offices do well during recessions, and pay well. Related tasks include billing, scheduling and medical coding that you can do from home.
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For quick money from side gigs, check out our list of 101 ways to make money right now.
5. Home-based business ideas
There are countless businesses you can do from home — including those that have not been invented yet! What is your idea?
Some ideas to start, where you can earn $100,000 or more:
Is it good to have cash in a recession?
It is always great to have cash on hand, at least a three-month emergency fund. Low interest rates on savings and money-market accounts during recessions mean that big stores of cash may be unattractive compared with other tools.
Who benefits from a recession?
Recessions can be financial bonanzas for some people — mostly the rich. Opportunities during an economy downturn include:
- Buy low in the stock market
- Home buyers and real estate investors looking to purchase a house — especially first-time home buyers who benefit from low interest rates
- Those looking to refinance debt, including a mortgage, student loans, car payments and credit cards
- Employers who benefit from a large pool of people looking for jobs
What should you not do in a recession?
In general, here are some no-nos (but common mistakes) during a recession:
- Liquidate all your investments
- Withdraw from your 401k or other retirement accounts
- Co-sign for a loan or otherwise take on more debt than you have to
- Avoid taking too many career risks
- Business owners should avoid capital investments now
How to survive a recession: 5 things to do
If you have lost your job and don't have a financial cushion, here is what you can do now:
- Focus on the basics: Rent, utilities, food and frugal living. Apply immediately for unemployment and other public programs. A budget is critical. Sign up for a free trial of YNAB to create a budget >>
- Sell things you don't need. Gold and jewelry, cars you can do without, clothes and appliances. You could also use consignment shops or pawn shops to get quick cash.
- Maintain your credit score — a low score means higher interest rates and digging yourself deeper in debt. Take steps to improve your credit: How to build your credit fast
- While you look for work, keep your skills current with an at-home side gig, or take online courses. Read: Best online and work-at-home jobs for moms
- Take advantages of all the resources available: