How a Bad Economy Affects You
Everyone hates a recession. We hear about foreclosures and job loss on the news, and our friends complain that they can’t afford to buy a new TV or go on that beach vacation because of the poor economy. We feel the squeeze, too, watching our retirement accounts and our kids’ college funds dwindle before our eyes. There’s even more tension at work ever since the guy down the hall got laid off. But is a recession always bad? Keep reading, and you’ll find out that while a recession is bad in some ways, it can be good, too.
You’re more likely to lose your job.
In the middle of a down economy, many more people lose their jobs. Companies go out of business or have to cut back on their expenses, and labor is one of their biggest costs. When cutbacks are happening, if you’re new or nonessential, you’re going to be one of the first to go. Even if you don’t lose your job, you’re unlikely to get a raise. Even those jobs that normally have an annual raise of 1 or 2% may halt raises for a few years. This doesn’t mean that raises are impossible to get, but carefully consider your timing and usefulness to the company. If you’re doing a job that could easily be outsourced and half of your company has just been laid off, consider holding off on that raise request.
Your savings account doesn’t earn much, and your investments go down.
In a good economy, savings accounts could easily earn you 3 or 4% returns. Right now, a good savings account will earn you about 1%. That’s not even keeping up with the annual inflation rate of about 3%, meaning you’re actually losing money by keeping it in a savings account. (Of course, this is still better than keeping your money in a checking account or under your mattress.) During a recession, your investments also go down. Your retirement account is probably worth significantly less than it was a few years ago. If your retirement is still a long way off, it’s nothing to worry about. If you were hoping to retire in the next few years, however, it could shrink your standard of living.
It’s harder to get credit.
Credit cards and loans become increasingly difficult to obtain in a bear market. Many of those who would have been able to buy a nice house in 2005 can’t even qualify for a starter home today. If you have credit cards, there’s a good chance at least one of your credit limits was decreased in the last couple of years. If you were hoping for a business loan for your new idea, stricter loan requirements mean you might have to wait to start your business or finance it yourself.
Houses are cheaper and interest rates are low.
While not as many people can qualify for mortgages, those that do qualify can get more house for their money. If you have a down payment and an emergency fund, as well as good credit, now is a great time to buy a house. Don’t rush into things, though. If we’ve learned one thing from the economic downturn, it’s this: if you buy a house when you’re not financially ready, it can come back to bite you later. Most experts believe that house prices aren’t going anywhere for at least a couple years, so you have time to save up and buy your dream house when it will be a blessing, not a curse.
You can buy stocks for cheap.
The up side of stock prices declining is that now you can buy them at a very low price. As long as our economy doesn’t collapse completely (which is unlikely, and then you would have bigger problems to worry about than your retirement portfolio), they will eventually go back up. This isn’t necessarily true of individual stocks, but it’s true of the market as a whole. That’s why you should diversify your portfolio. Mutual funds are a great pick because they choose a variety of stocks for you.
You have the chance to switch careers.
Technically, no matter what state the economy is in, you can restart your career. The thing is, many of us don’t. Losing a job and not being able to find another one in the same field is the kick in the pants that many of us need to do what we truly love. Recessions are a time of great creativity and innovation. Even though business loans are hard to come by at the moment, entrepreneurs are still finding ways to make their ideas work. If you’re sending out resume #50 and still have no bites, it may be time to focus your energy elsewhere. (That doesn’t mean you give up completely, just put it on the back burner.) Start that jewelry-making company you always wanted to try. Open an online store. Buy old clothes and sell them on eBay. Whatever that passion is that you’ve been too scared to pursue, now is the time to give it a shot.
You’ll find great deals and discounts.
During a recession, you can find some great deals. Since consumers don’t have as much money, companies know they have to lower their prices to compete. One of the reasons group deal sites such as Groupon took off is likely the poor economy. This is also the time that many budget-friendly products are introduced. You may be able to find cheaper vacations, more drink specials, and other discounts aimed at those on a budget.
While a poor economy does have some drawbacks, if you look closely, it can offer great opportunities. You can buy a house you otherwise would never have been able to afford. You can switch from a dull job to something that excites you. You can grow your stock portfolio more than you could if the economy were stable. So while you may not be able to afford that trip to Europe this year, try not to let the economic state worry you. The economy will bounce back, and in the meantime, keep following sound financial advice: spend less than you make, set aside some money for emergencies, and pay down your debt as fast as you can.