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What Is a Recession and How Will It Affect You?

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Key Points

  • A recession is a significant economic decline of a particular region for at least two quarters.
  • When a region is in a recession, people at all income levels are affected.
  • Most of the time, we don’t know we’re in a recession until after it’s been going on for a while.
  • Visit The Financial Today’s homepage for more stories.

In the past few months, we often hear from economic experts on the news that the world is heading towards a recession. Although we have a general sense and idea that a recession is a bad news for most of us, we don’t actually have a concrete idea of what a recession is and how it specifically affects everyone and everything around us.

A recession is a significant decline in general economic activity in a designated region in at least two consecutive quarters. In other words, a recession is when the economy slows down for at least six months.

When a region is under a recession, most businesses stop growing and some even close its doors. As a result, there are fewer jobs available and people make and spend less money. Usually, people at all income levels feel the negative impact of a recession.

Most of the time, we don’t know we’re in a recession until after it’s been going on for a while. Generally, economists note when these cycles start and stop by looking at economic data of a particular region from the last month or quarter. They look at things like income, unemployment figures, and retail sales. Economists also look at the gross domestic product (GDP), which is the total value of all goods and services sold in a region during a specific period.

When these metrics are declining, the economy is on a decline. And when they keep going down for six months or more, that’s a recession.

What causes a recession?

Recessions occur for several reasons. One of the main causes is inflation. That’s the increase in prices that means a peso won’t buy as much as it used to. When prices of goods and services increase too fast or go too high, consumers and businesses stop spending money. As a result, fewer goods and services are sold and businesses make less money. To cut costs, these businesses may lay off employees.

Another main cause of a recession are major events like the COVID-19 pandemic, natural calamities, and wars. That’s because they may cause interruptions to business operations that could lead to financial losses. When businesses lose money, layoffs happen. And as a result, people are more worried about the future that forces them to save their money and not spend as much as they would want to. 

How can a recession affect me?

When a region is under a recession, massive job losses are the most common effect we see around us. When you are out of work, it means you’ll be earning less money than you normally would.

As a result, you’ll be having a hard time paying your bills and other financial responsibilities that could lead you to go into debt or even lose your assets like your car or your home. The stock market will be affected too. If people and businesses stop spending money, companies’ earnings will surely take a hit that will result in a downfall of stock prices.

How can I minimize the effects of a recession in my life?

Recessions cause widespread layoffs. As a result, many people will be out of work and many will suffer huge financial losses due to the lack of sustained income their job once provided them.

To minimize the effects of recessions in a person’s life, proper personal financial management is a must. By ensuring that you have enough firepower in your bank account in the form of savings, you’ll be able to withstand all of the expenses that you need to continuously pay during a recession.

If you’re holding financial assets like stocks, expect to see your portfolio’s value to go down. However, keep in mind that these losses are just “paper losses” and it will only be realized if you will sell your holdings at a loss. The best thing to do is to analyze your portfolio’s fundamentals so you can make an informed decision whether to hold, buy, or sell before making any moves during a recession.

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