(Bloomberg Opinion) -- Our economy is in a will-they-won’t-they relationship with the next big recession. The stock market is officially in bear market territory (meaning stocks averaged a 20% decline from their high). The Fed hiked the benchmark interest rate by three-quarters of a percent, which is the highest increase since 1994. Inflation is being felt everywhere — even when I get my latte. And there seems to be a wave of mass layoffs.
So “guess who’s back, back again…” with some unsolicited advice for those who weren’t working during the last big downturn. Each recession is unique but tends to strike some fear in our hearts, particularly about job loss. In the Great Recession of 2008-2009, long-term unemployment (defined as 26 weeks or longer) soared from about 20% to 45%, according to the National Bureau of Economic Research. This generally makes it harder for people to pay bills, which leads to consequences such as repossessions of cars, foreclosures on homes or evictions.
Before you panic, let’s talk about what you can do to prepare for a potential recession.
Although we did, technically, experience a recession in 2020, we were fairly distracted by the global pandemic. By the time we emerged from isolation, the stock market stunned us with its recovery, we were ready for revenge spending and even the job market had employees in a position of power.
The economic climate looks very different now.
One thing Gen Z can expect is a lot more uncertainty. This is partly due to the fact that a recession won’t officially be announced until we’ve already been living through one for several months. Historically, a recession was marked by two quarters of economic decline and usually determined by a decline in gross domestic product and a rise in unemployment. However, it’s not a firm requirement.
Other indicators seep into the public consciousness before a recession becomes official. Inflation is one. People beginning to default on loans is another. A noticeable drop in consumer spending is a biggie. Then, of course, there’s layoffs.
Job loss (or even securing a job in the first place) is one of the biggest concerns in a recession. It’s a vulnerable feeling at any age, but it can be particularly brutal for those who are in the early stages of establishing themselves professionally and financially.
When the Great Recession hit, the eldest Millennials were 27, and many were only getting ready to enter the workforce. Some 8.7 million non-farm jobs were lost between early 2008 and 2010, according to the Bureau of Labor Statistics. And the job market didn’t recover until May 2014, even though NBER declared the recession over in the US in June 2009.
Millennials still bear the emotional and financial scars from the struggle to be gainfully employed. Despite being the most educated generation in history, our long-term wealth potential was likely seriously damaged as the recession delayed many careers from getting off the ground. The whole side hustle vibe wasn’t so much a desire as a need to cobble together a living wage.
That is a lesson worth remembering now: Diversifying your income streams can help you feel less vulnerable in a recession. (Just don’t get caught up in a multi-level marketing scheme, which tends to gain traction in times of financial uncertainty.)
For those who have a steady income, it’s wise to start shoring up those cash reserves. Particularly if you feel any tremors in your industry.
One strategy I use is building a “bare essentials budget.” It’s a way for me to know the bare minimum my household needs to get by each month. You strip away any non-essentials and focus on the cost of housing, utilities, transportation, pet/childcare, medicine, insurance premiums, minimum monthly debt payments and food. Knowing this number helps inform what I need to net after taxes.
You should also continue (or start) building an emergency savings fund. Take your bare-essentials budget number and multiply it by the number of months you’d want covered if you lost your main source of income. Three to six months is often the rule of thumb, but keep in mind that it typically takes a few months to find a new job.
Another consideration is your wider social safety net. Take stock of who in your network can be of assistance. Are there family members or friends you can move in with or who could provide a short-term loan without financially compromising themselves? Millennials living in parents’ basements became the cliche of our generation, but in reality, it made the most economic sense for many people.
How strong is your professional network to get help finding a new job? Would you be eligible for unemployment if you lost your job or main source of income? These are the questions to start thinking about.
Finally, don’t forget about your mental and emotional health. Your bare-essential budget might need to include therapy — that is essential to many and shouldn’t be put on the back-burner until the larger economy stabilizes. If living with family members isn’t a healthy option for you, it’s okay to pause on other financial goals in the short-term (e.g., making retirement contributions or aggressively paying off debt) in order to funnel money toward a workable living situation.
Recessions, much like a pandemic, are scary and uncertain times. No one economic downturn will exactly mirror its predecessor. All we can do is focus on what is within our control and brace ourselves for what may come.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Erin Lowry is a Bloomberg Opinion columnist covering personal finance. She is the author of the three-part “Broke Millennial” series.