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Expert Insights on Recessions

Posted on July 17, 2024 by MoneyGeek
MoneyGeek

Dr. Bob Wood

Article courtesy of moneygeek.com

What can the average consumer do to shield themselves, or at the very least, mitigate the financial impact of a recession on their lives?

The first rule in the event of an economic downturn remains "Don't Panic." Rather, individuals should reassess their current position and plan for potential changes. A good place to start is with a review of the monthly budget. Determine if expenditures in certain areas can be reduced or even eliminated. Use these savings to increase the family's emergency fund and pay off existing debt. Never consider retirement savings as a potential reduction; foregone retirement savings cannot be made up with future investments.

Older individuals should review their investment or retirement portfolio to determine if they need to make changes. Younger individuals need to know that an investment of retirement funds into S&P 500 mutual funds should not be changed; history has shown that the market return outpaces any other investment over any ten years for over 100 years. If employed, updating the existing resume and developing a job search plan is prudent; recessions are associated with company downsizing and an increase in the unemployment rate. If time permits, invest in the addition of new skills to enhance your attractiveness to employers if your present position is eliminated.

In short, prepare for the worst, although most individuals are relatively unaffected by recessions.

Considering recessions are happening every few years, what does that say about the modern US economy?

Recessions are a normal part of the economic life cycle. Economic expansion cannot be maintained indefinitely; upon occasion, the economy becomes overextended and needs a pause (recession) to "catch its breath." The FED's strategy is to encourage long-term sustainable growth (but not too much) that would lead to overexpansion and the resultant recession. Should this occur, the FED will use its available tools to shorten and lessen the negative effects as the economy slows.

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