Preparing for a Recession - Part One
While the fed is aggressively trying to counteract inflation by raising interest rates, it’s becoming clearer that a recession is almost inevitable at this point. That can cause a lot of fear and uncertainty. It can make you unsure of what wise next steps look like.
Do you retract from all spending because the end is near? Is it all political rhetoric and just go about life as usual until it blows over?
I’ll give you a few simple steps to get you headed in the right direction, but first, let’s talk about what a recession is and what the facts are.
1. What is a recession?
GDP is simply a measure of our country’s total economic output. More info here. When the GDP of a country is negative for 2 consecutive quarters, we are in a recession.
2. How often does a recession happen?
Since 1948, we’ve had 11 recessions which lasted an average of 11 months. The big one in 2008 lasted 18 months while the one back in 2020 was only 2 months. 1 This means that on average, we’ll get a recession every 6 years or so.
3. What is causing this recession?
This is a loaded question and you’ll find different answers depending on your news outlet’s political leanings. One way to look at it is that we had a pretty unprecedented couple years with the pandemic, broken logistic systems causing all goods and services to rise in cost, 0% fed rate creating cheap money which inflated an individual’s purchasing power, stimulus checks which flooded the market with more money thus devaluing it, and an insane bull market in stocks and crypto causing a euphoric frenzy just to name a few.
The fed uses interest rates as a control valve on our economy. In 2020 when the stock market crashed, unemployment hit 14.7%, people were scared so the fed dropped the fed fund rate to 0% to urge people out of their caves. Today, it’s a different story. We’ve overcorrected. Inflation is out of hand and you feel it everywhere don’t you? Groceries. Used car prices. Gas pump. Home prices. Rental prices. So to fight that, the fed has raised rates aggressively so far this year and has committed to continue to do so throughout 2022 to combat inflation.
They want a soft landing but most experts agree that a recession is all but certain. I know it may sound crazy, but in some ways, a recession is what we need right now.
4. What does that mean?
Recession is a scary word and if you watch too much news, they’ll make it sound even scarier so that you put your trust in their political views and create a common enemy of “the other guy.”
Here is what it doesn’t mean.
The world is not ending. This is not the Great Depression. (That lasted 9 years. FYI.)
You don’t need to run to Costco to get toilet paper and canned goods.
Take a deep breath. You’re going to be ok.
In the next post, I’m going to give you a few simple guiding principles that our family has followed for 20 years. They’ve guided us through multiple recessions including the Great Recession in 2008, financially vulnerable seasons like planting a church, and set us up to purchase a home in Southern California.
Fair warning. They’re not sophisticated. They’re not sexy. Intentional living rarely is.
The big idea I want to leave you with today is that you’re going to be ok.
Don't freak out. Don't make any rash decisions. Don't believe everything you hear.
If you’re in good financial shape, I believe the same principles that got you here will get you through this too.
If your finances are a bit rocky, you’ll be ok. Today is a great day to start heading in the right direction. Just like relational health, emotional health or physical health, financial health is not made by huge moves. They’re created with consistent small choices that happen over and over again.
We’ll get you there.
So stay tuned. I’ll post part two tomorrow and we’ll get through this together.
”For I, the LORD your God, hold your right hand; it is I who say to you, “Fear not, I am the one who helps you.” Isaiah 41:13