High-interest rates discourage investments due to high borrowing costs. Inflation, on the other hand, discourages people from spending as they can buy less with the same amount of money.
Central banks use interest rates as a medicine to cure inflation. However, the medicine doesn’t seem to work. Even though the Federal Reserve has increased interest rates four times this year, inflation has worsened.
Initially, there was a consensus that the next recession would occur within 18 to 24 months. Now financial markets have revised their projections and estimate that the next recession will take place within 6 to 12 months. The financial markets could be wrong.
Every recession is different. The leading cause of the 2008 recession was the subprime mortgage. Banks gave out loans to people who didn’t qualify, as banks assumed that everyone paid their loans. As a result, one bank went bankrupt, bringing chaos to the global financial markets.
There are a lot of downsides to a recession. The upcoming recession’s leading cause is inflation and high interest, supply chain issues due to the invasion of Ukraine, sanctions imposed on Russia, lockdowns in some areas of China, and much more.
The cause for every inflation is different, but the outcome is always the same. Among many things, possible scenarios include redundancies, foreclosure and bankruptcies.
Unfortunately, there is little one can do to prevent a recession. Like anything, being prepared is one of the best things you can do.
Even though the recession is closer than previously thought, there’s still time to protect yourself. One of the best pieces of advice is postponing significant purchases. The objective is to have as much cash flow, i.e. money in your hands or money in a bank, at your disposal.
For example, if your vehicle is still working and you’re considering purchasing a new one, you should rethink your decision. On the other hand, if you need to buy something and can’t do without it, you should go for it.
Saving money can save you on a rainy day. You have to distinguish between a need and a want. If one has a loan, one will pay higher monthly instalments. If a business goes bust and one ends up unemployed, a government handout might not be enough to keep up with the bills.
Remember that food is a need, and inflation will bite into your savings. You’ll need to spend more to buy the same goods as before. Therefore, you’ll have less money to buy wants.
However, the more money you save, the better. While prices of goods and services are increasing, the prices of stocks, cryptocurrencies and commodities are decreasing.
Even though the recession hasn’t started, it will be over like anything else. Getting through a bad situation is the worst part of everything.
If you think long-term, a recession is a good time for investing in value stocks, cryptocurrencies and commodities as they have decreased significantly in value. Unless you have saved money, you can’t invest in anything.
One must be vigilant about when to invest and not to invest. However, owning cash is one of the best investments right now.