The pros and cons of a recession from a financial planning perspective (2024)

FAQs

The pros and cons of a recession from a financial planning perspective? ›

From a financial planning perspective, a recession can give you the opportunity to make smart wealth management habits, including maximizing your assets. During a recession, your financial plan can benefit from: Lower prices — A recession often hits after a long period of sky-high consumer prices.

Costs are often lower in a recession, and that includes capital projects and capital equipment. In a low-opportunity market, margin concessions are easier to negotiate from contractors and equipment vendors. That makes a recession the perfect time to save money on a purchase and thereby increase your ROI in the future.

During a recession, stock prices typically plummet. The markets can be volatile with share prices experiencing wild swings. Investors react quickly to any hint of news—either good or bad—and the flight to safety can cause some investors to pull their money out of the stock market entirely.

Financial advisors and accountants

Financial advisors and accountants are recession proof businesses because they offer essential services that individuals and businesses need, regardless of the economic conditions.

As long as your short-term finances are holding up well during a recession, it's wise to continue saving towards your retirement. Plus, if you have a workplace pension, your employer is likely to pay into your pension too which further boosts your pot.

While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.

Banks during recessions FAQs

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

The unemployment rate almost always jumps and inflation falls slightly because overall demand for goods and services is curtailed. Along with the erosion of house and equity values, recessions tend to be associated with turmoil in financial markets.

Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.

Where is the safest place to put your money during a recession? ›

The Bottom Line

If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings. It's worth noting that a recession doesn't mean you should pull all your money out of the stock market.

Part of a financial advisor's job is to help clients create plans as “recession-proof” as possible. “While they may not be immune to economic downturns, their offerings for individuals and households can add extra security,” Pradheep says.

Your money will be secured in a bank account during a recession, but only if the bank is FDIC-insured. And if you bank with a credit union, your money is secured if the credit union is insured by the National Credit Union Administration (NCUA).

On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.

Firms selling inferior goods.

(goods where demand rises when income falls) e.g. value goods, second-hand stores e.t.c. Some firms like supermarkets will not be adversely affected by the recession. Although people will cut back on luxuries, they will not cut back on food.

Use the Dollar-Cost Average When Share Prices Decline

When that happens, remember the first lesson: The stock market will usually begin to bottom well before the end of the recession. Knowing that, investors can take advantage of a declining market through the dollar-cost averaging method of investing.

Increased stress all around. One of the most prevalent ways that recessions affect the average person is simply that stress goes up. It doesn't matter if you're comfortable in your job security and have a hefty financial cushion, or if you're struggling to make ends meet and have $100 in your savings account.