The pros and cons of a recession from a financial planning perspective (2024)

FAQs

The pros and cons of a recession from a financial planning perspective? ›

From a financial planning perspective, a recession can give you the opportunity to make smart wealth management habits, including maximizing your assets. During a recession, your financial plan can benefit from: Lower prices — A recession often hits after a long period of sky-high consumer prices.

Recessions have plenty of negative consequences, but they can provide a necessary reset for the markets. Higher interest rates that often coincide with the early stages of a recession provide an advantage to savers, while lower interest rates moving out of a recession can benefit homebuyers.

Reduced competition: Some competitors may struggle or even go out of business during a recession, allowing surviving businesses to gain market share. Cost efficiencies: Lower demand can lead to reduced costs for materials, labour, and real estate, which can improve profit margins.

A potential recession is the right time to reassess your debt accounts and take note of your current interest rates and outstanding balances. Consider putting as much of your income toward high-interest debts as possible — especially tax-deductible debt accounts, such as educational loans.

Recessions cause declines in sales that can spiral as the resulting layoffs further depress demand. Credit access tends to tighten amid rising economic uncertainty, while loan delinquencies and defaults increase alongside bankruptcies.

Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate. Within the stock market, shares of large companies with solid cash flows and dividends tend to outperform in downturns.

While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.

Unemployment was rising, company profits were falling, financial markets were tumbling, and the housing sector collapsed. Is there a single word to describe these developments? Yes: “recession.” The crisis was accompanied by recessions in many countries.

During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.

Where is your money safest during a recession? ›

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.

Economic expansions create opportunities: new businesses, more jobs, and higher wages. Recessions reduce opportunities: failed businesses, fewer jobs, and lower wages. Recessions normally don't happen every year, but they're not unusual.

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

Build up your emergency fund, pay off your high interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.