by Daniel Mannix, CFA® | Jan 20, 2023 | Economy
A recession refers to a widespread drop in spending. It can last months or even years. One way of detecting a recession is if the nation’s gross domestic product (GDP) has been negative for at least two consecutive quarters. A recession can be triggered by many different kinds of events, including natural disasters and long periods of inflation.
The word “recession” often causes people to feel anxious about their financial situation. However, recessions are not always completely detrimental to your finances, and there are even pros as well as cons of a recession. Healthy wealth management strategies can help you be prepared in the event of a recession. Knowing the reasons behind the pros and cons can help you secure your finances appropriately in the event of a recession.
3 pros of a recession
It is completely possible to build and protect your wealth during a recession. 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. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
- Increased entrepreneurial opportunities — While unemployment rises during a recession, some people use this as an opportunity to be their own boss. If you were thinking about establishing your own company, a recession can be a good time to do so, especially since prices of equipment and other assets are lower than usual.
- A healthier portfolio — During a recession, businesses that are inefficient or unproductive can no longer afford to stay open. As a result, they shut down. Over time, more established and efficient businesses become more successful. This phenomenon can help strengthen your portfolio as less efficient companies are replaced by healthier, stronger ones.
3 cons of a recession
In addition to the pros of a recession, there are also several cons. You can keep the following points in mind when considering the effects a recession might have on your financial plan:
- Unemployment — During a recession, companies have to cut positions in order to trim expenses. Unemployment is a major con of a recession, and it can make you feel insecure when it comes to your own job.
- Decreased asset values — During a recession, your assets may be worth less than they were beforehand. For instance, if you are a homeowner, the value of your house may be less than it was when you bought it. As a result, if you were planning on selling your assets, it may be better to wait until the recession subsides.
- Higher national deficit — People pay less in taxes when they make less money. This means that the government is receiving less income, and it will need to start borrowing money. This contributes to the national debt and will likely mean raised taxes in the future.
Talk to a ProVise CFP® professional about the pros and cons of a recession
Are you worried about a recession restricting your financial growth, with the cons getting in the way of the pros? Our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circ*mstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about the pros and cons of a recession? Contact ProVise today to schedule a complimentary consultation.
