5 Reasons Why A Recession May Occur and How to Prepare for it as a Millennial

millennials and recession

If you are among the millennials planning to secure your financial future while working on something you like, welcome to the club! Here at The Idea Bucket, we have the same plan & that’s why we are putting together amazing resources and free tools to help you get ahead with your plan and help chart out a future, small business blueprint. Not your thing? No worries! We also have skill development resources to help you be more prepared for the gig economy era! Read more about on our Gig Economy Resources page and let us know what you think!

Still not sure if it can be done? Read this wonderful piece on creating million dollar tech businesses this weekend that you can get started with right now!

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Introduction To The Beginning Of A Troubling Economic Pattern

Greece was hit by a massive economic downturn a few years ago with the Govt- Debt Crisis. IMF optimistically predicts Greece to be 12% poorer than it’s 2008 indicators. Maybe, we all remember the images of rioting still fresh in our memories. It is surprising that the recession so bad, it affected the financial stability of all the EU yet did not shift the financial paradigm of a Greek family at a granular level. The Greek life is structured in ways of a micro autarky.

 

Micro Autarky

Greek families save cash in banks. Markets pegged against banks perform desirably better than those pegged to the stock market. The Greek family’s expenses are minimal and economic activity is limited to FMCG products. Good for the family, bad for the economy. Their savings are purely liquid assets. Commercial purchases are barely minimal. Again, good for the family and bad for the economy.

When the recession finally came in and the economic catastrophe happened, the Greek families got saved to a large extent from the macroeconomic effects.

 

Trends Before the Economic Crash

  1. The purchasing power of an individual in USA exceeds the output the same individual contributes to the economy.
  2. Let’s not worry about the interest rates much as we are at a neutral of 2%-3%. The Fed might stipulate a raise. A rise in interest attracts cash into the Fed’s exchequer and money supply ( M2 precisely ) will choke the economy into a cash thirst, worsened with a credit driven market.
  3. Stocks look bullish. This is one of the greatest golden bull runs since 2008 and the bust period is only waiting to happen. The volatility can be confirmed against demand driven markets like the cryptocurrencies. There are a lot of new investors in the market who are prone to quick reaction, the sheer volume of new investors is what causes the market oscillation.
  4. Sub-prime lending is back. Since 2014, there has been a constant increase in lending out money to applicants with bad credit.
  5. Velocity of money is a downward sloping curve given the blockage in lending repayments and loss of the circulatory value of the currency. Your dollar bill takes a lot more time to change hands in an exchange for products compared to a year ago, as said, the slope is worsening.

 

Recession Proof Financial Plan

The biggest changes in a market effect in just a few days followed by larger periods of a continuing trend.

  • Commodity Markets are stable during recessions. Hard commodities like steel, oil, precious metals etc. do not sway much during the recessions. Soft commodities like coffee, sugar, meat, etc. follow the suit.
  • Bonds, mutual funds, real estate and sick units are available for cheaper than the market price in times of the recession.
  • Gold – all recessions see gold performing well while the market collapses. This happens due to the credit freeze, reduced spending, capital injection and finally the loss in value of money (inflation). Currency that loses value reflects on gold prices driving it up. Gold was seen performing 80% better than standard during a slump.
  • Discount Retailer stocks perform well during the recession as the shortage of money drives the customers to opt for discount retailers like Wal-Mart. Times of prosperity drift discount retailers to lose business as the economic surplus is diverted to high-quality products. (Wal-Mart’s net income increased significantly in 2008, 2009 and 2010)

 

Save for the Rainy Day

As an amateur economist, the above reasons might be enough to shake my trust in the economy. Remember credit is your nemesis in a recession. To manage the exposures of personal finances and reduce the impact recovery period we at the Idea Bucket plan to follow some strategies. Cash savings are important before the recession hits. There are many reasons why:

  • The crashing stocks are sold by the companies at a great discount. Buying stocks during the recession is one quick way to increase your wealth in a short time. If this opportunity is lost it might take another 10 years at an average of 9% returns p.a to get there. This is a shortcut you will not want to miss.
  • Ensure the Insurance is paid. Large insurance companies usually can resist economic downturns. To save your wallet, try staying on top of the insurance payments.

 

Cashless individuals are the worst hit during recessions. If you’re one of them, the Idea Bucket team would like to suggest you to increase income from various sources in this period as the bull market is also the best time make money to tide over an impending recession.

_________________________________________________________

 If you are among the millennials planning to secure your financial future while working on something you like, welcome to the club! Here at The Idea Bucket, we have the same plan & that’s why we are putting together amazing resources and free tools to help you get ahead with your plan and help chart out a future, small business blueprint. Not your thing? No worries! We also have skill development resources to help you be more prepared for the gig economy era! Read more about on our Gig Economy Resources page and let us know what you think!

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This post was written by AS Prashanth, co-founder & in-house economist, and business analyst. He has a master’s in Economics and another in Information Technology and Computer Science. He is currently working as a DevOps Engineer in Connecticut and is also working on a Business Intelligence course at Harvard Business School. 

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Disclaimer: Please read our site’s policy. The opinions expressed here are for information purposes only. Please seek professional advisement before you choose to chart out your financial future or base your decisions on this.

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