Are you wondering what a recession is? We explain what happens in a recession, what it could mean for you and how to survive a recession.
Every office has one: the water cooler zone. Yours might be the reception area, the kitchen or at a literal water cooler. Mine seems to be my desk. I’m going to take it as a compliment but I have since moved to a different desk hidden behind a plant to get some work done.
Last week, my plant camouflage had not done its job and so I was instead engaged in conversation about the recession. They introduced the topic, I nodded along. But then I realised something: they didn’t know what a recession was. This was evident when they ran out of adjectives for the word ‘bad’ when describing the recession.
And that got me thinking: how many of us actually know what a recession is?
So that you can impress by the water cooler, here’s the run down on what a recession is, what it means for you and how to survive a recession.
What is a recession?
A recession is a decline in the growth of your country’s economy that lasts for more than six months. Healthy economies grow which means more people are getting jobs, people are buying stuff at the shops and wages are going up (hooray!). An economy in decline means the opposite is true, with more people losing their jobs and not finding another one, people are scared and stop spending as much money at the shops and people stop getting pay rises (boo!). By the way, if your pay is frozen, this effectively means you’re being given a pay cut because inflation decreases the value of what you earn.
The experts tend to define a recession as six months of an economy in decline because they can spot serious problems like the ones we’ve outlined if the economy fails to grow for two quarters in a row. A quarter, in case you’re wondering is three months of the year, which is a definition that you can now apply to understanding the finance section of the news better.
What could a recession mean for you?
A recession could mean losing your job
With people not spending as much money, there is less demand for goods and services. This means that shops and businesses will find it tough to survive and many will start laying people off. Consultancies are at risk of this because their consulting services are not essential and when we don’t have much money, we focus on the essentials first. This is also why essential services like nurses, teachers and fire fighters tend to keep their jobs during a recession because our society cannot function without them.
It can be difficult to find a job in a recession
At a time when many people have lost their job, those same people will be applying for new jobs. If you graduate during a recession, you’ll be competing for jobs with people who have lost their job due to the recession and who likely have more experience than you. Even graduate programs are oversubscribed, as many entry level programs take applicants who have graduated within the last 5-10 years, which means people just leaving university are competing for the same role as someone with more years of experience.
Businesses are at risk of bankruptcy
When people are losing their jobs or are scared of losing their job, people will spend less money at the shops or on services. This means less money flows to businesses despite still needing to pay for the costs of running their business including paying staff and renting an office space. The impact of this is that many businesses will be doing it tough or face potential bankruptcy if they can’t afford to cover their costs.
Investments will lose money
An economy in decline means that the market is in decline. If you have money in the market including shares in companies and real estate, you are likely to see the value of those assets decline as the market has declined overall.
Retirements funds will lose money
Many retirement funds have at least some of your retirement nest egg invested in the market. If investments are declining, this will also impact retirement funds. A recession is horrible timing for those who were due to retire because they can see the retirement fund that they worked so hard for losing money. The effect is that many people who were due to retire will instead stay in the workforce for a few more years to build back up their retirement fund, which is completely understandable. The impact of this is that there will be less vacancies for someone to move into, which can limit the number of jobs available.
How to survive a recession
You can prepare yourself for a recession and survive the worst of it by saving at least 10% of what you earn now into an emergency fund, checking your risk profile which is how at risk you are of losing money, paying off debt including paying off your credit card and your buy now pay later account balances, investing effort into your career and knowing how much it costs to be you. If you want more detail about how to get financially ready, check out our 5 steps to prepare for a recession.
The most important thing to remember when you’re in a recession is that it won’t last forever.
A recession brings extreme difficulties like losing the job you love, needing to close the business you put your money into building or seeing your retirement fund lose value. It’s a feeling of not being in control of what’s happening around you but the experience can feel better if you fully understand what’s happening. Remember that a recession will not last forever. What goes up must come down and if the market falls, it will rise again one day. Make sure you are ready for a recession and that you take steps to survive a recession with your financial future intact.
Read more: 5 steps to build an emergency fund