5 Biggest Mistakes You Can Make During a Recession

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A lot can be said about what can be done in order to avoid an outright recession. For the most part, we always wish for governments, corporations, banks and everyone in between to simply do better in order to avoid the downfall of our economy.

But sometimes it’s best not to put our hopes up on things that are out of our control, so if a dreaded recession does come along, it’s time for every household to look at how they can help keep their own finances afloat.

Here are key things you can do in order to protect your finances and wealth, so that even if you do take a hit, you can minimize the impact it will have on you in the long run.

Click NEXT to find out more crucial information on what you can do to shield yourself during a recession.

Becoming a Cosigner

Cosigning can be seen as an extreme act of kindness and trust, but it should not be taken lightly even outside of a recession. That’s because if the person taking the loan is unable to make payments, you’ll be on the hook for them instead- and that’s not a situation that should be taken lightly.

During a recession, both you and the person who is taking the loan are at greater risk. They may lose their job, which in turn would put you into economic hardship by having to make scheduled payments instead. This associated risk is something you have to take into account at all times.

Becoming a Cosigner, Part 2

So let’s say you don’t want to be on the hook for the loan if the person can’t make payments, but you do want to help them out.

First, look for other ways to help them out, such as going over their finances and looking for ways for them to cut down on expenses. At times, people may find it hard to cut back if someone isn’t there to point out obvious ways to rearrange their budget.

But if you have no choice but to help a family member or close friend cosign, then you have to be prepared in case of a worst case scenario. In that case, having some money set aside should help. That cushion will give you some wiggle room if worse comes to worst.

Sometimes, however, it may be better to help them with a downpayment instead.

Taking out an Adjustable-Rate Mortgage

When purchasing a home, you may choose to take out an adjustable-rate mortgage (ARM). In some cases, this move makes sense (as long as interest rates are low, the monthly payment will stay low as well). Interest rates usually fall early in a recession, then later rise as the economy recovers. This means that the adjustable rate for a loan taken out during a recession is nearly certain to rise.

While interest rates usually fall early in a recession, credit requirements are often strict, making it challenging for some borrowers to qualify for the best interest rates and loans.

But consider the worst-case scenario: You lose your job and interest rates rise as the recession starts to abate. Your monthly payments could go up, making it extremely difficult to keep up with the payments. Late payments and non-payment can, in turn, have an adverse impact on your credit rating, making it more difficult to obtain a loan in the future.

Instead, assuming you have decent credit, a recession may be a good time to lock in a lower fixed rate on a mortgage refinance, if you qualify. However, be cautious about taking on new debt until you see signs the economy is recovering.

ARMs, also known as adjustable-rate mortgages may sound like a great idea when you’re trying to purchase a home. Your hope here is for the interest rate to stay low, in order for your monthly payments to stay low as well. During a recession, as interest rates fall, you may count yourself lucky. But remember, after a recession there typically go up.

You must also keep in mind that during this time, perhaps because interest rates are so low, credit requirements are very strict. Finding the right loan for yourself might be challenging, if not impossible in some cases.

Taking out an Adjustable-Rate Mortgage, Part 2

During a recession, thinking about the worst-case scenario is a must in order to prepare yourself for them ahead of time.

In this case, you might want to consider the possibility of you losing your job. If that happens, once the interest rates go up, alongside your monthly payments, you’ll find it increasingly difficult to keep up.

If you find yourself in a situation in which you’re making late payments, remember that these will negatively impact your credit rating. So, in the future, you’ll have a harder time obtaining a loan.

So, instead of looking for an ARM, during a recession it’s best to snag a lower fixed rate on a mortgage refinance.

Assuming New Debt

If you can cover monthly payments and are responsible with your finances during good times, then taking on new debt shouldn’t be an issue. However during a recession, taking on more debt is one of the biggest mistakes you can make- and sadly, some households simply do not have any other options.

The risk of being laid off should keep you from taking on new debt, though sometimes it is that exact risk that causes people to go down this route even during a recession.

But what happens if you do lose your job? Well, you may be forced into taking not one but even several low paying jobs to not only cover your usual expenses, but now added monthly payments too. In some cases, you may be unable to make those payments, anyway.

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Assuming New Debt, Part 2

So, long story short, you need to consider your job situation during a recession before assuming new debt. You may not lose your job, but the possibility of your income getting cut is still pretty high.

Ask yourself why you are planning on assuming this debt? Once you get to the bottom of that, you can decide if it’s necessary or not to go through with it at this time, or wait until the economy heals.

Remember, making this move now could lead to bankruptcy. If you can, pay cash. If not, that big ticket item would have to wait, even if you’re already waited for a while to get it.

But if the situation is dire and you need the extra money, look for other solutions. Sometimes, it may even be best to ask family or friends if they can help you out of a tough financial spot.

Taking Your Job for Granted

If you work for a large corporation and think your job is secure, think again. Plenty of large corporations have had to deal with immense financial pressure during economic recessions, meaning that they had to reduce expenses- and one way to do that is to lay people off.

Of course, most companies would seek to cut back on operating expenses. Then, it’s likely they would cut back on dividends. But, finally, if their finances don’t come out right on the other end, they’ll have to start shredding jobs.

That’s why, no matter where you work, you have to be mindful that you could lose your job in an instant through no fault of your own.

Taking Your Job for Granted, Part 2

Do everything you can to ensure that your employer’s opinion of you is a good one. While a lot of jobs will be vulnerable during recession, making sure you’re a valuable part of the team is key.

Some key things to consider are coming in early, staying in late and making sure your work goes above and beyond. If you do that, your boss may reconsider laying you off. Also, ask them directly what you can do to help, as taking on more responsibility will also show them your willingness to help the company out.

To put it simply, ensure that you are not a marginal worker. And furthermore, if you are worried that you’re going to lose your job and are thinking of looking for other places of employment, absolutely do not do this within earshot of your employer!

Making Risky Investments

If you own a business, then you should know how dangerous a recession might be for you. Thinking about the growth of your business should always be at the forefront of your thoughts, but making risky moves during a recession could be your downfall.

Ask yourself- is now really the time to stick your neck out? Even if you’ve been planning a potentially risky move with a high reward for months, if not years, going ahead with the plan during a recession could have the exact opposite result of what you would have wanted.

34And in the case of most businesses, this ‘risky move’ might involve investment projects that will require you to take on new debt.

Making Risky Investments, Part 2

Let’s say you want to increase your inventory- great, but first you need the space. In order to get the space you’ll probably need a new loan to add the physical floor space. During a recession, when you’re looking at interest rates for a loan, these may sound appealing since they’ll be pretty low.

But remember, it’s not just interest rates that are falling, it’s also very likely that your business is slowing down too. Will you therefore have enough money to pay interest and principal on time?

The best thing for you to do is wait for interest rates to go up a little bit, a sign of the economy going back to normal, before taking on a new loan.

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The Bottom Line

Does all of this mean that you have to keep your money under lock and key and stop touching it until the economy is back on its feet? Far from it. Being in a recession means you have to rethink some of your strategies, from helping others to how proactive you are at work.

Speaking of being proactive, it’s best to always have a plan in place before the recession hits. Now, this may seem impossible since you can’t tell what the future holds. But always having a realistic budget and having some savings set in place will help.

Reduce your exposure to financial risks, be mindful of how the recession may affect you personally! These two tips are at the basis of all recession-proof strategies, so we hope we’ve helped you figure out what to do going forward!

Let us know how you’ve dealt with economic hardship in the comments down below!

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