How to Survive a Recession: 5 Things You Should NOT Do

The COVID-19 pandemic has had a devastating impact on the global economy. We continue to hear heart-wrenching reports about the number of infected persons and a startlingly high death toll. Countries around the world are struggling to control the spread through testing and quarantine, and some are still on complete lockdown. In the headlines, we read about the increase in unemployment, and it is quite clear that some companies are taking a big hit. 

Despite the slowdown felt by many in the US, the National Bureau of Economic Research (NBER) has not officially declared a recession. A commonly used definition of a recession is two consecutive quarters of declining gross domestic product (GDP). The NBER considers several factors in determining a recession, and the data used is typically delayed. Hence, the NBER tends to declare a recession after it has already begun. Given what we are currently experiencing, some economists believe we are already in a recession.

Before panicking, you must remember that recessions and downturns are inevitable. While the circumstances are different this time around, recessions have occurred in the past and will happen again. Focus on mitigating your risks and taking prudent steps to survive, so you come out as good or better than you were before. Below is a list of five things you should not do during a recession.

1. Worry About It

We get it; it is easy to worry. These are frightening times. The biggest worry some people have is the uncertainty about how bad things will get. It is so easy to panic and to envision the most catastrophic outcomes. However, predicting the worst only compounds the problem. The best way to handle any stressful situation is to change your focus. Don’t think about what can happen and what you cannot control. Focus on the things you can do instead. For instance, you cannot control how many people contract the virus in your city, but you can reduce your exposure and risk. Practice social distancing, wear a mask outdoors and sanitize. You cannot control whether you lose your job, but you can plan and prepare in case you do. Start with a list of all the possible solutions and start taking any necessary steps you can now. You can’t control how long the lockdown in your location lasts, but you can stay connected with loved ones. Make it a priority to reach out to friends and family; video chat or use social media. You will be amazed at how your anxiety decreases when you start taking positive actions.

2. Take on New Debt

You should avoid taking on new debt during a recession. Let’s face it, in an economic downturn, the probability that you will be laid-off increases. If you are out of a job, it increases the risk you will default on the loan. Even if you get another job, there is no guarantee that your salary will be the same or higher. If your income is less, this places a tremendous financial burden on your ability to repay. Hence, if you are considering a loan, make sure you contemplate the worst-case scenario. Ultimately, you should avoid large unnecessary purchases and refrain from increasing your credit card debt.

3. Maintain an Extravagant Lifestyle

When the economy is thriving, and money is easy to come by, many spend it on extravagant things. People purchase larger houses with a higher monthly mortgage, buy expensive cars, and live lavishly. They do this because they believe they can afford it and can make the monthly payments. The mistake some people make in a downturn is to continue their unsustainable lifestyle. During a recession, having cash and an emergency fund is more important than ever. It is your primary source of security. Even if you haven’t lost your job, you are at risk. Hence, you should reserve your income for essential items; food, clothing, shelter. Pay your mortgage or rent. Also, make sure you continue to make the minimum payments on loans you already have. You don’t want to default, lower your credit score, or worse go into foreclosure. Cut-back or eliminate non-essential expenses. If you don’t need it to live, don’t buy it. 

4. Take Your Job for Granted

When the economy is strong, companies tend to carry excess capacity and retain sufficient employees to handle growing demand. However, when the economy turns for the worse, even large corporations make strategic decisions to cut costs. What this means is that your position is not secure during a recession. Never assume you are indispensable and don’t take your job for granted. Show your boss that you are a valuable employee. Be productive, dependable, and be willing to be flexible to accommodate strategic changes. You want to be that employee that your employer won’t want to layoff.

5. Guarantee or Cosign a Loan 

This last one is a no-brainer. When you guarantee a loan for someone else, you are responsible for paying the debt if that person defaults. This decision is almost always a bad idea and an even worse idea in a recession. No matter how sure you are that your family member or friend will pay, you are placing yourself at unnecessary risk. Also, remember that any loan you cosign shows up on your credit report. If you later need to secure a loan or mortgage for yourself, the cosigned loan can hinder how much you can borrow. It can even prevent you from getting approved for another loan if the creditor determines you have too much credit. If your friend or family member fails to make a payment or pays late, this negatively affects your credit score. You might be concerned that refusing to cosign can ruin the relationship you have with your loved one. However, consider that if you cosign and they default, the damage to your relationship could be much worse.

Final Thoughts

We know that these are tough times. However, it is helpful to remember that an economic downturn will not last forever. Look to the light at the end of the tunnel. Focus on doing what you can now to survive and come out on the other side.

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