4 Ways to Prepare Better for Recession

Recession is a concept that every individual fears. The Great Recession in 2008 is unforgettable for most US citizens. Described as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters”, the 2008 recession, however, lasted from December 2007 to June 2009. Even though there has been a gradual improvement in the overall economy, financial experts cite the occurrence of another recession post the Trump administration’s trade war with China with its effects already seen abroad and now slowly filtering into the US. [2] While many would continue to argue whether the recession is coming to the US or not, the best route is finding ways to soften the blow, if it comes. Here, we outline 4 areas that one can look into to strategize well before or during a recession. 

1. Employment

The first thing that an individual brace for is unemployment when a recession strikes. While the bills remain constant, either the income gets lesser due to pay cuts or there are receding savings because of unemployment. Below are some solutions to unemployment during a recession.

• Get a second job. It might pay less, but at least some funds would trickle in. 
• File an unemployment claim. 
• Work closely with headhunters. During a recession, every job may take the hit, but if you work closely with headhunters, you would get to know where there are opportunities that are still available and suit you. 
• Speaking of headhunters, have you tried the recruiters in alumni communities such as Alumni Alliances? 
• Take this downtime to further your studies. Also, this would be the right time to explore new job markets. Additional studies will help find different career paths that you could pursue.[3]

2. Real Estate

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“A real estate bubble or a property bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then decline.” [5]

Flashback to the 2008 recession…

From 2001, there were sequential cuts to mortgage interest rates that banks charged to their prime or low-risk customers. This enabled banks to give loans to millions of customers who otherwise would not have qualified for home loans at that interest rate. Because of a cut in the mortgage rate, the demand for housing increased dramatically, which in turn increased the prices of housing. When housing rates did start to rise in 2005, the demand fell for housing creating a simultaneous downfall in prices. [6]

Here, homeowners were affected in two ways: 

1. Because of the rising interest rate, the borrowers who were on the terms of an adjustable-rate mortgage (A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.) [7] ended up with a mortgage that they could no longer afford or pay for.
2. They could sell the property to settle their debts, but since the demand for housing fell which in turn decreased the prices of homes, the borrower could no longer sell their house for a profit.

Although known as one of the safest investments, real estate takes the biggest hit during the recession. The best thing to do during this time is to somehow hold on to the real estate property. One way could be to refinance the mortgage or sublet a portion of the property so that one could benefit from rental income. [8]

3. Debt

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Debts are born out of recession. With pay cuts or unemployment, one is bound to binge on things that are more important such as survival! But it is also vital to keep debts in check and pay the ones that might especially damage your credit score if overdue, pushing you to the brink of bankruptcy. One’s credit history has a ripple effect on so many other situations in life such as:

• Job opportunities – some employers check the credit history of a candidate.
• Credit card and loan interest rates.
• Insurance rates.

To overcome this, pay bills depending on how important they are. For example, it is wise to not default on mortgage payments as this as a direct impact on credit scores. It is also advisable to keep sizable savings and reduce debts consciously to avoid drastic situations such as evictions or bankruptcy.

4. Investment in Stocks

Investment in stock markets. Losses incurred have a huge financial impact on an investor, especially if they invest large chunks in stocks or bonds.  During a recession, prices fall tremendously and usually, there is no way out of this. Or so we may think. Stocks, bonds, currencies, etc. belong to one asset class. Remember the first rule of investment? Never to pile all your eggs in one basket! But we end up doing just that. We invest all our cash in either bonds or stocks and then suffer the losses during the recession. But there is a way out. One can start thinking about other asset classes such as bitcoins or cryptocurrency. Investing in a different asset class will minimize the chances of losing out, especially if the market for the paper assets class declines. 

Alumni Alliances is a professional alumni community that provides a platform to find investors, projects for investment, influencers, recruiters, mentors, and mentees. It also helps in organizing events, provides business solutions, search for jobs as well as promote business and real estate. 

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References:
1. Featured Image – Jp Valery
2. Is a Recession Coming to the US? Here is what to watch for
3. 9 Effects of the Recession on Families and How to Cope
4. Image – Terrah Holly
5. Real Estate Bubble
6. Great Recession
7. Adjustable-rate Mortgage
8. 9 Effects of the Recession on Families and How to Cope
9. Image – Ehud Neuhaus