What is a Recession and What Do I Need to Do About It?

Matt Gray, CFP®
You’ve probably heard the term “recession” thrown around quite a bit when politicians, businesspeople, or other prominent figured talk about the economy. It’s an amoebic term that doesn’t have an easily measurable definition, but many people know it to mean the economy isn’t healthy.

Most people familiar with recessions consider two consecutive quarters of reduced economic production (the value of goods and services) to be a recession, but even that doesn’t quite encompass reality. Would two minuscule drops in production mean there is a recession or is that just a rounding error?
The textbook definition of a recession is, “A significant, widespread, and prolonged downturn in economic activity.”. Great, but how can you measure significant, widespread, and prolonged? I think “significant” is meant to rule out rounding errors like I mentioned above. “Widespread” is likely meant to apply to the majority of the whole economy rather than just, say, the lumber market. Lastly, “prolonged” is likely meant to rule out the confusion that a significant weather event that slowed the economy for a few days or weeks would qualify as a recession.

You can probably see why it can be difficult to scientifically define what a recession is. Leave the precision to the dang economists! For your purposes, a recession is an economic slowdown significant enough that it will likely impact your finances in some way. This, of course, begs the question: What can I do about it? I’m glad you asked.

What Can I Do About It?

Being in a recession is kind of like being on an indefinite camping trip. How much should you bring to eat and drink? What kind of clothes should you bring? Any special supplies required? Because we don’t have all the answers in that situation, we typically need to prepare for the worst and hope for the best.

This means in a recession, you need to figure out which financial supplies you need. Consider how much cash you need on hand, how much debt you have, how much you currently spend, how much you could survive on, where you can cut expenses, and is there anything you know you are going to need (money for surgery, wedding, etc).

  • Accessible cash – Most people should have somewhere between 3-6 months of cash on hand in case you lose your job or have unexpected expenses. This can fluctuate based on your situation.
  • Expense Management – I hate being the bearer of bad news but lavish vacations or similar excursions may want to be postponed during a recession. Same with other “want-based expenses” like a new car when yours works, expensive clothes, or significant gifts.
  • Debt Review – This is a great time to pay down debt if you are faring well throughout a recession. Not only does it strengthen your financial position, but it allows for those debt vehicles to be used later if absolutely needed.
  • Career Focus – Recessions are times to focus on your employability and focus on expanding your skills. You’ve decided to skip the trip to Bali, maybe those funds can now be used to make sure you are indispensable at work.
  • Talk to a Financial Planner – Financial planners help with this kind of stuff all day, every day. Your situation is different than your neighbors and a financial planners can help identify how to help get you through a recession.

No one is immune to recessions, even if you are to follow the above guidance to a “T”. The best you can do is prepare like you would for any other situation where something can go wrong. Understand your resources, what steps need to be taken if things go poorly, and work hard to make sure they go right! Also, talk to a financial planner to help determine your priorities and where you can strengthen before/during a recession.

About the Author - Matt Gray is a Childfree Financial Planner who holds both the Certified Financial Planner® designation and the Chartered Advisor of Philanthropy designation. He enjoys working with his Childfree peers because he enjoys helping solve the specific needs of the Childfree community. Furthermore, he believes choosing a less traditional life path leads to more unique life stories and he loves helping those stories become a reality.