Confused about recessions? Read this guide for 3 minutes

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All you need to know about recessions in just a few minutes.


the main points

  • A recession is a prolonged period of economic decline.
  • Recessions often lead to layoffs and job insecurity.
  • Any steps you can take to shore up your emergency fund and pay down debt may help you deal with the downturn.

Business leaders and economists have been sounding the alarm about the economic downturn for several months. So what’s the big deal? What is slack exactly? How can you prepare? Find out with our three-minute guide.

What is slack?

The most common way to define a recession is a prolonged period of economic decline. Recessions can be painful, but they are a normal part of economic cycles. In good times, the economy grows. But in bad times, the economy contracts.

Some say that if the economy contracts for two consecutive quarters, the country is officially in recession. The reality is a bit more complicated. An organization called the National Bureau of Economic Research (NBER) figures out when a recession starts and ends, and uses a few different indicators to make that call.

How long do recessions usually last?

Recessions can take different forms depending on what is causing them and how you deal with them. Looking at recessions since 1854, the NBER puts the average length at about 17 months. The shortest recession of all was the 2020 COVID-19 recession, which lasted just two months.

How can recession affect me?

One of the biggest effects of a recession is that people can lose their jobs. When faced with lower demand, companies are looking to cut costs. One way to do this is to scale back plans for new hires first and then lay off existing employees. An economic downturn can lead to increased unemployment and lower job security in all respects.

Another effect is that the value of your investment may decline. We’ve already seen a bear market in 2022, and some experts predict that stock market performance may deteriorate in 2023. There is a lot of uncertainty about what might happen. But this kind of volatility can have a significant impact on people who are approaching retirement age and looking to withdraw from their investment portfolios.

What can I do to prepare?

The first step you can take to prepare for a recession is to understand your financial situation. Look at how much cash you have in your bank account, what your monthly expenses are, and how much money you owe. If you’re not sure where to start in terms of tracking your spending, a budget app might help.

Once you know your financial situation, turn your attention to your emergency fund. Having three to six months’ worth of living expenses in a savings account can make all the difference in a financial emergency like losing a job.

If you’re carrying high-interest debt, especially that of various credit cards, find ways that you can pay it off. If you lose your job or your income is cut, any debt payments will eat into your monthly costs. Additionally, if you fall behind on your payments, you may have to pay late fees, your credit score may suffer, and you may eventually have to deal with debt collectors. And the more you pay before the downturn, the better.

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Recessions aren’t fun, but they eventually pass. We don’t know if we will enter a recession in 2023, and if we do, how severe any downturn will be. The best way to prepare is to strengthen your financial foundations. If we get into a recession, you’ll be better able to weather the storm. If we don’t, you’ll be in a good position to deal with any other financial emergencies that might arise.

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