There seems to be a consensus between world-renowned economists and investors that there will be a recession. When this happens, no one knows yet. Yet there’s a probability it will occur between the last quarter of 2022, with higher chances in 2023 and drag into 2024.
The cause of every recession is different. For example, the 2008 recession was caused by what is known as the sub-prime mortgage. Banks and other lending institutions primarily engaged in risky behaviour by giving out too many loans assuming that everyone pays their loan.
So far, the primary indicators of the upcoming recession are chain woes created by COVID-19 and the invasion of Ukraine by Russia. Even though wars around the world aren’t something of the last century, supply chain problems became worse when Western countries with the likes of the United States, the European Union and the United Kingdom imposed economic sanctions on Russia.
According to the International Energy Agency, the EU imported almost half of its natural gas from Russia. The EU claims that Russia uses energy as an economic weapon to destabilise Europe.
Since the war started, the European Union has been less dependent on Russian energy supplies. Energy is an inelastic good, meaning regardless of whether the prices go up or down, people or nations, in this case, will consume more or less same amount energy. Another example is cigarettes.
The EU has fewer buyers from where to buy its energy, and the remaining suppliers are at liberty to increase prices. Since most goods require some form of energy process, such as manufacturing, this will result in price increases causing inflation.
Central banks are no longer discussing if a recession is on its way but are trying to use tools like interest rates to limit the impacts. They are ideally targeting a soft landing over a hard landing.
A soft landing recession is where central banks increase interest rates to lower inflation to discourage consumption while keeping the economy growing. A soft landing assumes that the economy won’t take long to recover. A hard landing is like a soft landing, except that the economy will stop growing and take longer to recover.
Simple money-saving tips
There is little to nothing individuals can do from an economic point of view except pray that leaders and central banks make the right decisions. However, there are a few things that you can do for yourself.
One of the most valuable lessons you should learn when learning about money is “cash is king”. A profitable business may go bankrupt if it doesn’t have cash, while a loss-making business can survive with enough cash reserves.
Money is significant, especially during the current period when the world may experience food shortages.
During tough times one should improve their cash holdings. One can do this in two ways – increasing income and reducing expenditure. While a wage increase would help during difficult times, a wage freeze or a wage cut is more likely to be on the menu.
Increasing your cash inflow
One can increase their cash flow by doing simple things. One of the simplest forms is to sell unwanted items like old baby stuff like pushchairs, highchairs, or discarded items gathering dust and moisture somewhere in the house like books, toys, old appliances, etc.
While these won’t sell for the same amount you’ve originally bought them, they’re still dead inventory and useless unless they have some sense of nostalgia. Most items are just occupying valuable space in the house.
One of the best venues to sell your items is on Facebook Marketplace or any other classified ads website.
Decreasing your cash outflow
Waste is a thief. If you go through a deep thought process, you’ll probably find ways you’re wasting money on things you don’t need. Examples could be streaming services like Netflix or YouTube Premium or gym memberships that you barely use.
To be frugal means being careful in your spending. There are ample ways to be aware of what you’re spending. For example, dedicating some time to prepare your lunch at home instead of buying lunch will save you money.
Buying a tin of coffee and enjoying it at home or at work instead of buying it from a high-end coffee chain will save you money. Commuting by public transport and carpooling, if possible, is another money-saving idea. The list is endless.
The current market conditions show that the stock market is in free fall. Stock prices are declining, and there doesn’t seem to be a bottom. While some investors may argue that keeping cash is a bad idea, it would be better to lose 8% in the value of money because of inflation than to lose more than half your investment in poor market conditions.
You can always buy shares at a lower price if you buy your investments when the market bottoms out and start recovering gradually. You’ll maximise the number of shares for the same amount of money.
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