Although I am currently unaffected by the economic situation, I know that a recession can create a domino effect, therefore, what should I be wary of in the future? Thanks.In a recession, economic growth falls dramatically. The stock market declines, and usually enters a bear market. This usually causes a "flight to safety", where investors buy Treasury Bonds, which causes interest rates to fall. Employers reduce new hiring, and eventually start laying off workers.
To revive the economy, the Federal Reserve usually starts lowering interest rates to spur business lending and investment. The Federal Government may institute tax breaks to spur consumer spending.The current economic slowdown was started by a housing market decline which itself was initiated by the Subprime Mortgage Crisis. This decline also means that existing home values have fallen by 10%. In a recession, prices could fall another 5-10%.
How It Affects YouYou have probably already felt the impact on your home's value, and therefore your home equity. This reduces your wealth. You will continue to feel the impact on your retirement savings, as stock prices decline, further reducing your wealth.
The greatest risk is if you are in an industry that has layoffs, and you lose your job. If you aren't laid off, then you will probably be asked to work longer hours to compensate for the new employees who aren't hired.
As the recession continues, you may benefit from lower interest rates and tax cuts, which are applied to everyone. Normally, this would help you refinance or get a better mortgage. However, lenders have become more stringent about credit standards, so you won't benefit unless you have great credit scores.
Recession-Proof Your Personal Finances
- Could the Stock Market Decline Cause a Recession?
- Housing Market Outlook - Its a Bust
- November Consumer Credit 11% Greater than Last Year