Coronavirus hit Canada so quickly that thought we’d have to survive a recession as well as a pandemic. Few people could have predicted it would be as devastating as it has been. Not only has the Coronavirus pandemic affected the health of Canadians, it has affected their pocketbooks. Some economists are predicting that it could be worse than the Great Recession.
It’s a good idea to prepare for a recession because nobody knows when the next one will arrive. When you don’t prepare, it can mean a lot of financial stress for your family and you. By preparing ahead of time, you have a better chance of coming out the other side with your finances in decent shape.
Let’s look at signs of a coming recession, what happens in a recession and tips to prepare for a recession.
Signs of a coming recession
Although economics like to try to predict when the next recessions will happen, it’s often easier said than done. That said, there are signs you can watch for. Here are some signs of a coming recession, along with things that cause recessions.
Consumers Begin to Become Less Confident
When consumers aren’t spending as much on products and services, that’s a clear sign a recession could be looming. Consumer spending drives the economy. When consumers are feeling good about the economy, they up their spending. However, when they’re feeling less confident, their spending drops.
If consumer spending has already started to slow, that means a recession is already here. Economists closely watch consumer sentiment surveys to see if a recession could be on the horizons.
Interest Rates Behave Oddly
When government bond yields start behaving oddly, that’s another sign a recession could be coming.
Most of us would expect the yield on a 10-year government of Canada bond to be higher than a five-year Government of Canada bond. You’re locking in your money for a longer period of time, so it only makes sense.
However, in recessions over the last few decades, longer-term bond yields have actually dipped below shorter-term bond yields. This has resulted in an inverted yield curve. When this happens, it’s a sign that a recession could be soon to follow.
Factories Slow Down
While manufacturing isn’t as important to the Canadian economy as it once was, factories slowing down isn’t a good sign. The health of the manufacturing industry is still a good indicator of the health of the Canadian economy.
When the manufacturing industry is shrinking for a prolonged period of time, a recession could be on its way in the near future.
What happens in a recession?
To survive a recession, individuals must understand the possible consequences of one. Here are a few common things that can happen in a recession.
Losing Your Job
One of the most common things that happen in a recession is job loss. For example, nearly two million jobs were lost in Canada in April amid the Coronavirus pandemic.
Job loss can have a devastating effect on families and individuals. Not only are our family’s finances negatively impacted, so can our feeling of self-worth and our health. While many people use the time off for self-development, others have a tough time mentally and can suffer from depression.
Changes to Your Lifestyle
Lower household income due to job loss likely means tightening your belt. That usually means spending less on everything that you love; mainly, discretionary spending. It’s fairly common to see changes to your lifestyle in a recession. When you lose your job you probably won’t be able to afford to take trips or dine out at fancy restaurants anymore.
You’ll need to take some time to review your spending and see where you can cut back. Of course things like food and shelter are necessities; although you might consider moving to a more modest place and going out to restaurants less often.
The Stock Market Drops
Although it’s totally normal for the stock market to fluctuate from one day to the next, the stock market may take a nosedive during a recession. This means that you could take heavy losses if you decide to sell then. If you’re a senior living off of your investments, this can have a devastating impact on your portfolio. It could result in having to scale back your lifestyle or going back to work.
Real Estate Value Drop
Real Estate values also tend to drop in a recession. And this makes total sense. It’s hard to afford to buy a home when you don’t have a job. With fewer people buying homes, this causes real estate values to go down. Not only could you see your home sell for less in a recession, it could take longer to sell.
Survive a Recession By Preparing
It’s far better to prepare for a recession than it is to wait for one to arrive and cross your fingers and hope everything goes well. Here are some helpful tips to prepare for the next recession.
Prepare Ahead of Time
Instead of waiting for a financial emergency to shake up your personal finances, it’s better to prepare ahead of time. You can do that by creating an emergency fund. An emergency funds acts as a safety net of sorts. Ideally your emergency fund should have three to six months’ worth of living expenses in it. It’s also a good idea to keep your emergency savings in something liquid like a savings account rather than the stock market. That way when a financial emergency comes up, you’ll be able to weather the storm.
Focus on Your Needs, Not Wants
When you’re feeling overwhelmed by high interest credit card debt and lose your job, it can be a disastrous situation. In times like that it’s best to go into “survival mode.” Take the time to review your budget. Look for anything you can reduce or eliminate. Scrutinize discretionary spending like dinners out, shopping and leisure. Make sure you have your basic needs taken care of (food and shelter) before you even start thinking about wants.
Get into the Habit of Saving Money
Once you’ve cut back on all the unnecessary expenses in your budget and you’ve freed up some cash flow, put that extra money to good use. Instead of spending it on good times like concerts or the movies, consider paying off debt. Focus on the debt with the highest interest rate to save the most.
Also, aim to save money. When I say “save money,” I mean actually saving money in a savings account. Set it up so your savings is automatic, so you’re not tempted to spend it. You’ll be saving money without even realizing it. You’ll be well on your way to improving your finances for the better over the long term.
Ditch the Bad Spending Habits
Ditch the bad spending habits and try to develop better ones. Look at yourself and your spending habits. See if you spend money out of habit or because you’re bored. If that’s the case, change your behaviour to avoid putting yourself in that situation.
To help with better long-term financial planning you might consider using a personal finance app like Mint. Mint helps you do a better job tracking all the money that you spend. Another great app is Flipp. It helps you comparison shop to find the best deals on all the necessities from groceries to toiletries.
Grab a Helping Hand
If you’re struggling with your finances, don’t be shy about asking for help. You’ll want to take the necessary steps to get your finances in order before an economic downturn.
If debt is your issue, speaking to a credit counsellor can help. A trained credit counsellor can help you do a better job of managing your debts. With your debts under control, it will make you that much more nimble for the next great recession.
As you can see, if you want to survive a recession, you must prepare. It’s almost inevitable that a recession will arrive at some point. Wouldn’t you rather be prepared than be caught off guard? When you take the time to prepare ahead of time, you’re less likely to be as negatively affected by it as others.