What is a Recession?
Recession, recession, recession. Everyone has been talking about this topic lately.
Andrew Horowitz
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What is a Recession?
Today on Money Girl, I will be talking about what that dreaded “R” word means to you.
Recession, recession, recession. Everyone has been talking about this topic lately. Some say a recession is almost here, others say it has already begun. But, what is a recession exactly?
First, lets get to the definition of a recession and then I will give you some tips on how you could recession-proof your life.
Defining Recession
Well, technically, a recession is when the GDP or gross domestic product is showing two consecutive quarters of negative economic growth. While they are extremely unpleasant, recessions are a normal part of the business cycle and typically, well, last for six to eighteen months. What makes a recession noticeable to you and I is when it starts affecting our wallets.
So how can you spot a recession before it comes? Well, there are a number of ways. First of all, the obvious way is to watch the Gross Domestic Product (GDP). You can find the numbers anywhere online; a good website like Briefing, Dismal, Microsoft. If there’s a sudden drop in the domestic product and production, there’s a chance a recession might be coming. But you have to be careful in making those assumptions. Do your homework first. Maybe something fishy is going on with government policies on foreign trade, maybe a series of recalls, layoffs and outbreaks of illness have thrown things out of balance and they’ll quickly restore themselves the following quarter. There are thousands of factors that go into GDP that really sometimes can sometimes be difficult to determine whether they’ll be another quarter of negative growth or if it is an aberration.
You can also watch the value of the US dollar. If the value drops while other currencies maintain their value or rise, it can sometimes mean an impending recession. Obviously when you see a drop in the dollar value, it is always in relation to other currencies. But, be aware of why the dollar is dropping and if it has to do with the other currency rising, or the dollar actually moving down. What we have seen lately is the dollar moving down, and that is obviously a precursor to the recession we are witnessing right now.
Lastly, you can learn about the money supply and watch for decrease in that statistical measure. That is also a real good forward forecasting method to see if a recession is going to be around the corner.
Recession-Proof Your Life
Now, the really important part…how to recession proof your life. It’s all about planning ahead. Start paying off that bad debt. By ‘bad’ I mean those high interest credit cards and late fees. Combine all of your debt into a much better scenario for yourselves. Find the lowest interest rate possible, and you’ll have more success in balancing those books further down the line. Start a side business that can help keep you afloat should the economy take a turn for the worse and you’re laid off or have, you know, maybe your hours cut. Obviously it is all about planning ahead. Make sure you continually invest in your 401K plan as much as you can. Think about it, stocks are low and you get more for your money right now. Take that extra money you have and put it somewhere you know it’s going to grow no matter what happens to the economy. Make sure to refinance your mortgage and get a lower interest rate. This will help you save big time during a recession.
Benefiting from Recession
Which brings me to the upside of a recession. If you’re set up for it, if you are up for it, a recession is a time where you can make a lot of money. Interest rates always drop during a recession to entice people to borrow more money and make purchases, which will effectively stimulate the economy. So think about, if you have some money socked away, maybe it is a good time to start thinking about investing in some of the really beaten down real estate maybe the companies that have really been thrown to the side, maybe start looking at buying stocks that have been really beaten up.
Be smart, invest smart. Now is the time to invest in many of the things that were really high priced before. There are plenty of stocks, real estate investments and bonds and a whole host of companies that need money… and you can be the place to supply it. And you’re going to probably come out smelling like a rose sometime in the future, once the recession passes. [[AdMiddle]
Buying homes from people right before they’ll have to, well they have to foreclose, will not only help them out and save their credit, but it will give you an unbelievable bargain. Sure, it may need some paint and carpet but that’s nothing considering you’ll be able to sell it for a cool hundred grand more when the market shifts in a year or two. It’s investments like these that will help you increase your personal wealth dramatically.
Cha-ching! That’s all for now, courtesy of Andrew Horowitz, QDT’s Winning Investor and your guest host for Money Girl’s Quick and Dirty Tips for a Richer Life.
https://www.amazon.com/exec/obidos/ASIN/0978708377/investmentadvi09With all the speculation about recession in the news lately, a lot of listeners have been asking about what is a recession and how does it effects them. So, thanks to Joshua and Duc for sending in questions and to thank them we are going to send them a copy of my book, The Disciplined Investor – Essential Strategies for Success.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Thanks for listening!
Recession image courtesy of Shutterstock