- Date : 01/10/2022
- Read: 5 mins
Many aren't aware of what recession means; hence, it's clearly explained, and further, some guidelines which include what you should not do during an economic downturn are discussed.
What is a recession?
A recession occurs when the economy ceases to grow and contracts. A recession is a substantial drop in economic activity for several months after decreased output and an increase in unemployment. Conversely, economic output growth varies, generating a "business cycle" with highs and lows in economic activity. In the slump of a business cycle, production growth might be low or negative.
While recession may last for a few months, the economy can take years to recover, and achieve the peak it was at before the recession had taken place. As unemployment increases at a higher rate during recession, the same continues into the early stages of a recovery.
5 things to avoid doing during a recession
You can follow several easy guidelines to safeguard your money throughout a recession. It is advisable to keep a close eye on your spending and avoid taking unnecessary risks that might compromise your financial goals. An emergency fund with your savings can also be maintained.
Here are a few things you should avoid doing during a recession.
1. Obtaining an adjustable-rate mortgage
In a strong economy, there is nothing wrong with Adjustable-Rate Mortgage (ARM) because your monthly payment will remain cheap as long as the interest rate remains low.
Interest rates decrease early in a recession, but then, as the economy improves, they tend to rise, indicating that it's more feasible for an adjustable rate loan carried out during a recession to increase after the downturn.
Your monthly payments will climb when the economy recovers and interest rates rise, and if you cannot keep up with it and miss a payment, this might harm your credit rating, making it more challenging to obtain a loan in the future.
If you're required to obtain a mortgage during a recession, choose a fixed-rate mortgage instead.
2. Becoming a Cosigner
Cosigning a loan carries a high risk. Cosigners may be obliged to make payments if the borrower cannot do so.
It is best to avoid guaranteeing loans for others when the economy is struggling because there is a higher chance that both the borrower and the cosigner would lose their jobs or witness a reduction in their company revenue.
You could be asked to cosign for a relative or close friend anytime. In such a case, to lessen the financial load, you can propose paying a portion of the down payment or offering a personal loan with the conditions you choose.
Save some money in case things go wrong, or have an emergency fund. You will not be in a dilemma this way.
3. Undervaluing your job
Every organization may experience financial strain during a downturn in the economy, forcing it to search for ways to cut expenses. Generally, this results in dividend cuts, cost reduction, declined expenses and job attrition.
Workers cannot assume that obtaining another job will be accessible during a recession since jobs become unstable. So make sure you are not taking your job for granted.
4. Considering new debt
If you're considering taking on more debt, be aware that if your income decreases, your financial situation might be more difficult.
Having less debt will make your job search easier if you lose it. You are more inclined to accept the first job given to you, even with less payout, or make risky investments when concerned about how you will pay back a debt.
You'll be in a much better position and mindset to recover if you keep your debt low and do not make any decision you feel remorse for. Consumer spending is bound to happen even during the recession, so taking on debt will not be helpful.
5. Investing at high-risk
Investment is not uncommon, especially for business people. Running a business requires expansion and growth after initially surviving in the market. Investments should not be made during an economic slowdown.
Taking debts sounds like a good option, as the interests charged are generally lower. So, debts can be taken to increase production capacity. However, debt repayment may be a hurdle during a recession.
Therefore, invest your money whenever the signs of a sustainable recovery of an economy are visible, and the interest rates have just started to rise.
Also know about the Different types of risks that you should be aware of when investing
A recession is not an easy period to go through when the economy is slowing down. Hence, it is advisable not to take risks with your money and wait for the economy to grow again.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.