What Is a Recession and How Might It Affect You?

How long does a recession last?

Recessions can be nerve-racking, but they don’t last forever and are an expected part of the business cycle.

Still, it’s often hard to tell how long a recession will last since no two are exactly the same – the cause, scope, and duration can vary.

For example, they may be relatively short: The 1980 recession lasted six months. Or they could be more prolonged: The 2008 financial crisis lasted 18 months. 

But regardless of how long it may last, a recession can affect us all in some way. 

How might a recession affect your job?

Companies typically try to cut costs when business slows down. As a result, people could see smaller paychecks because of reduced work hours. Some may even lose their jobs if companies decide to further cut their payroll. 

This is why economists pay close attention to the unemployment rate when trying to determine whether we’re in a recession. Growing unemployment is often a sign of economic trouble and can signal further challenges ahead. 

How might a recession affect your ability to pay bills?

As people bring home less money or lose their income, bills such as credit card payments and mortgages may start to pile up, causing financial stress. Some may lose their homes, cars, or other assets when they can’t pay on time. And others may have to take on more debt to pay for essentials. 

In the face of these financial pressures, people are likely shopping and dining out less to save money. The drop in consumer spending can hurt businesses large or small, which could lead them to cut even more hours or jobs. In this way, recession can create a vicious cycle that can make hard times worse.   

How might a recession affect your ability to save for retirement?

Saving for retirement takes patience and discipline even during the best of times. But this can become a real challenge during a recession. 

After all, if you’ve lost your job, retirement savings is probably the last thing on your mind as you focus on covering essential living expenses. 

People who still have jobs may question the benefit of contributing during a time of market volatility and stock losses. They may even be tempted to stop their contributions altogether until the economy recovers. This is how tough economic times can sometimes knock people off course when it comes to their financial goals.

Before making any decisions to pause your contributions, take a moment and evaluate your financial situation. If you can afford to, keep contributing what you can – every little bit adds up over time.  

How might a recession affect your ability to borrow? 

While interest rates tend to fall during a recession, making it cheaper to borrow, it can be risky to take on new debt during an economic downturn. For instance, a reduction or loss of income (e.g., due to job loss or sluggish business sales) could impact your ability to make loan payments on time. 

Also keep in mind that in a recession, lenders may heighten their credit requirements for borrowing; the stricter qualifications could make it harder for borrowers to secure a loan. 

What you could do to prepare for a potential recession

Recessions can paint a tough economic picture. But there are steps you could take to help maintain a sense of control and confidence over your finances in times of uncertainty: 

1. Boost your emergency fund.
2. Prioritize essential spending in your budget.
3. Stay on top of debt to maintain a good credit score; look for ways to consolidate at a lower interest rate.
4. Stay focused on the long term when it comes to saving for retirement – don’t try to time the market.
5. Consider opportunities to earn additional income like taking on a side gig and keep your resume updated if you're concerned about potential layoffs at your company.