What is a Recession & Depression? How it affect my finances?

What is a Recession?

While there’s no widely acceptable definition of a recession, virtually all economics agree that a recession is a period of declining economic activity. Businesses experience little growth causing the employment rate to fall, price of housing drops, and the Gross Domestic Product (GDP) falls by 10% or more within a 12 month period.

What is a Depression?

A depression is a recession lasting over a longer period.

Things to Fear in a Recession

Less Job Security

Declining consumer spending means business don’t sell as much as they used to. Many businesses will face bankruptcy and those still alive could layoff workers in a bid to remain profitable. In a recession, job security becomes a bigger problem as workers have less bargaining power over wage increases, holidays, non-work days. In many cases, workers may be asked to combine duties outside their job description to compensate for job losses.

Reduced Stock Values

Investors heavily reliant on the stock market will become less wealthy all of a sudden. Recession periods are often triggered by a declining mortgage market or a drastic decline in stock prices. Whichever be the case, it’s the consumer invested in stocks who’ll find he’s investment in worth nothing over night.

Reduced Mortgage Values

In September 2008, housing prices around the country had dropped 20% from the boom period in mid-2006. A recession usually sees more residents having negative equity on their homes. As a result of this and probably other problems such as those above, homeowners may be forced to walk out on their mortgage, which are non-recourse loans, so there’s nothing to lose asides the home itself.

Stricter access to credit

This is probably one of the first things to notice in a recession. The banks don’t want to go out of business from delinquent loans so tighter measures are put in place to help remove potential defaulters. Loan applicants will face stricter screening policies and the slightest of bad decision making on a credit report may mean declining the application.

Things to Enjoy in a Recession

Lower Interest Rates

During a recession, stricter conditions are usually put in place by lending institution to weed out likely defaulters while protecting themselves from a reduced capital base as a result of this. The Government reduces interest rates in order to fight the lack of consumer spending and reliance on loans; thus the interest rates drop to encourage consumers who may qualify under stricter lending requirements.

Tax Cuts

As the Government tries to make consumers spend more of their paycheck, tax cuts are likely tool to be used. This was so in February 2008 when the Economic Stimulus Act of 2008 was signed into law. Under the law, the Government wrote off $168 billion in income tax rebates which were mailed to taxpayers.

Favorable Pricing

Prices of consumer goods would drop during a recession/depression. This is due to businesses trying to encourage customers to buy their products/services.

Surviving in a Recession/Depression

Hold onto that Job

In a recession, never resign from an appointment even when another is promised. Competition for fewer jobs created means job seekers have a really difficult time finding jobs even on part-time. You might not be left when your employer decides to cut back on its workforce, but there’s really no sensible reason to throw away a means of income during a recession.

Spend Less

This might be the hardest thing for people to accomplish. After living a life of paycheck to paycheck with little or nothing left for years, there’s really no incentive to save but a recession is different.

What if the job and only means of income is lost?

To avert a situation where you become helpless, saving during a recession is important even if you have to cut back on your feeding habits.

Don’t Save in the Closet

Another big mistake people make during times of a recession is saving money at home. The FDIC insures deposits in savings, checking and money market accounts up to $100,000 for every FDIC approved bank. A recession usually sees increases in crime, and you don’t want to lose that money to a thief when it’s safer in the bank.

Similar Posts:

• Getting Ready For a Crisis August 14, 2009
• Laws to Prevent and Counter the Financial Crisis April 15, 2009
• How to improve your cash flow? February 19, 2009
• How to Save and Still Live in Full? February 4, 2009
• Protecting your Earnings from Inflation August 24, 2009
• Credit Cards for Bad Credit July 19, 2010
• How to Avoid Common Balance Transfer Mistakes November 10, 2009

1 Comment | Author: CreditCardsCo | Categories: Financial Planning

Comments:

1. Patrina says: [19 Mar 2010 - 8:12 • ]

   This is the most helpful information I have found so far, thank you for this.

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