Manage inflation and prepare for prolonged recession

A recession is a temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. The main causes of recession are caused by economic shocks, financial panics, rapid changes in economic expectations, or some combination of the three. Learn how our executive coaching services may be able to assist leaders during these times.

There’s no certain answer, but many experts believe a recession is coming. And, if one does occur, it could happen within the next five years. Moreover, a recession could be especially damaging because it would come on the heels of an already weak economy.

What Is Inflation?

“Inflation is a rise in prices, translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some time. The rise in prices, often expressed as a percentage, means that a currency unit effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases” (Fernando, 2022) [1].

Inflation is calculated from the price change of a diverse set of products and services commonplace in the average person’s lifestyle. This includes utilities, fuel, food grains, metal, entertainment, transportation, etc.

This increase in the price of goods leads to a loss of consumer purchasing power. The impact on the cost of living for the general public ultimately leads to a decline in economic growth.

“Inflation is the parent of unemployment and the
Unseen robber of those who have saved”
– Margaret Thatcher

Due to rising inflation, businesses try to reduce production costs and increase prices, resulting in a recession as prices soar and people are laid off to decrease company expenses.

Strategies For The Recession

While we are currently not in recession, experts deem it to become more and more likely as time passes. As we head into the next five years, there are many things that households can do to protect themselves from inflation and recession.

Emergency Fund

First and foremost, it is important to have an emergency fund in place and if you already have an emergency fund, bulk it up. Most economic experts recommend that you have at least 3 to 6 months of living expenses covered with this fund. It is scary how quickly a recession can change your circumstances.

This will help you cover unexpected expenses if your income decreases or disappears completely. While this fund is important, don’t get too bogged down in trying to reach a specific target.

“In addition to having a recession rainy-day fund, Christine Benz (director of personal finance for Morningstar) recommends figuring out where you might go for additional funds if you need them in a pinch” (Singletary, 2022) [2].

Downsizing

The greatest downside of a recession is how high the prices of common commodities can climb. Consider downsizing your home or investing in less expensive property. This will help you free up some extra cash each month, which can be used to pay for everyday necessities, decrease debt or build up your emergency fund.

“Your life does not get better by chance,
It gets better by change”
– Jim Rohn

You may also need to renegotiate your mortgage or rent payments and look for ways to boost your income. For example, you could take on a part-time job or start freelancing.

Portfolio Management

Times like these are cause for great panic amongst the average investors. Market volatility may make you think you should get out of the market but never make an investment decision based on fear or panic.

While it doesn’t look good out there for the stock market, it has been historically proven that stocks recover well after a recession.

Now, you need to make sure your investment portfolio is diversified. This means investing in a mix of stocks, bonds, and other assets. This will help to protect your portfolio from losses if the stock market declines.

Lifestyle Change

A recession is a time when most people’s income often stagnates or declines, sometimes often disappearing completely. This is why you might want to consider switching to a lower-cost lifestyle.

Downsizing your lifestyle may mean giving up some/most of your luxuries, but it will save you money in the long run. This might involve cutting back on luxury items, eating out less, or taking a staycation instead of an annual holiday.

Deciding if something is a need or a want isn’t always black and white. Some things may seem non-essential to some people, but others can’t live without them. It’s all about weighing your current priorities with your long-term goals.

A great tip is to start buying canned goods with a long shelf-life. People should start using bicycles, start walking, or using public transportation as their means of commuting. Every little bit helps.

“As sure as the spring will follow the winter,
Prosperity and economic growth will follow recession”
– Bo Bennett

Additional Source of Income

At the moment, it may look like you don’t need the money, try to find an additional source of income, whether it be a second job or even freelancing. This will boost your income and savings because you never know what might happen in a recession.

There are a record number of job openings, with the unemployment rate at 3.6 percent. According to the Labor Department, the economy saw job gains in transportation, warehousing, leisure and hospitality, education, health services, and government.

If you’re thinking of changing roles or finding a second job, you should know that while no job is completely ‘recession-proof,’ certain industries tend to fare worse than others during a recession. The greatest ‘recession-proof’ industries include health care, government, computers and information technology, and education.

Get Rid of Debt

Before the recession hits, getting rid of or reducing your debts is the best thing to do. Reduced cash inflow during a recession means it will become harder to pay off the debt, especially high-interest debt.

“If you are carrying any high-interest-rate debt, start focusing on paying it down. Not only will it help you be prepared if you lose your job, but rates are also expected to increase in response to rate hikes by the Federal Reserve. The national average credit card rate rose above 17% for the first time in more than two years due to the Fed’s most recent increase, according to CreditCards.com. The central bank expects to continue to raise rates for the rest of the year” (Fox, 2022) [3].

Career

Recessions usually go hand in hand with high unemployment rates so preparing your career for the big hit is essential. Now is a great time to reach out to others in your field and start building a network using sites like ‘LinkedIn.’

It has been proven that higher education usually involves lower unemployment rates, so if you plan on returning to school, getting a certification, or pursuing another educational opportunity, now is a perfect time.

Networking and maintaining strong connections with workers in your field could also help you find new opportunities before they’re listed online in what’s bound to be a more competitive market. A great way to make yourself marketable is to increase and strengthen your skill set by pursuing more training and certifications.

“Recession doesn’t deserve the right to exist. There are just too
Many things to be done in science and engineering to be bogged down
By temporary economic dislocations”
– Walt Disney

Challenges

A recession is never easy and will always have a dire impact on you and everyone you know. Even if you start preparing for a recession now, challenges and hurdles are constant. Some of the main challenges that people will face while in the recession, and also while trying to prepare for a recession, include:

Trying to keep their jobs and income levels stable in a turbulent financial time
Dealing with increased costs of living, especially for essentials like food, housing, and utilities
Growing their savings and investment portfolios in a way that will protect them from inflation while also preparing for a recession.
Those with debt, especially high-interest debt, may find it difficult to afford rent, groceries, and other essentials. If they don’t make regular payments, it leads them to default state and damages their credit score.
Preparing for the possibility of a prolonged recession or even a depression
Companies usually predict trends like these and start to prepare by decreasing the cost of production, which translates to an increased unemployment rate decrease in hours and wages for the employees.
Recessions are emotionally and mentally taxing on almost every person. People tend to worry themselves sick about the financial well-being of their loved ones.
There is usually an increase in crime rate as people start to take desperate measures to make ends meet.

While all of these challenges are daunting, it is important to remember that there are ways to prepare for and manage them. By being proactive and taking steps now to recession-proof your finances, you can help ensure that you and your family are better equipped to weather any economic storms that may come your way in the future.

“Obstacles are found everywhere, and in
Overcoming them we nourish ourselves”
-David Belle

“Some layoffs are inevitable in a downturn; during the Great Recession, 2.1 million Americans were laid off in 2009 alone. However, the companies that emerged from the crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements” (Frick, 2019) [4].

Conclusion

So, while a recession may or may not happen soon, it’s important to be prepared. These tips can help protect yourself from inflation and recession during the next five years. However, it is important to remember that no one can predict the future and that there is always some risk involved in investing.

If you are uncomfortable taking on this risk, you may consider saving your money in a savings account or investing in a less volatile asset. However, if you are willing to take on some risk, these tips can help you weather the storm and come out ahead in the end.

Ultimately, on a global scale, we must identify and build on technology being used effectively to support workers and ensure that job mobility, continuous learning, and access to information are widely available to drive employment opportunities and protection for workers (Markovitz, 2022) [5].

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