- Becoming a cosigner
- Taking out an adjustable rate mortgage
- Accept debt
- Take your job to award
- Take risks with investments
- The bottom line
In a sluggish economy or outright recession, it's best to watch your spending and not take undue risks that could put your financial goals in jeopardy. Below are some of the financial risks everyone should avoid during a recession.
Become a Cosigner
Lending can be very risky, even in tough economic times: If the borrower fails to make scheduled payments, the cosigner could be asked to make them instead. In an economic downturn, the risks associated with co-signing a note are even greater, as the person taking out the loan has a higher chance of losing their job – not to mention the increased risk of the signer becoming unemployed.
That is, you may find it necessary to cosign for a family member or close friend, regardless of what is happening in the economy. In such cases, it's worth setting aside some money as a cushion. ( See also "8 ways to help family members with financial problems.")
Taking out a mortgage with a variable interest rate
When buying a home, you can choose an adjustable rate mortgage (ARM). In some cases, this step makes sense: as long as the interest rates are low, the monthly payment also remains low.
But consider the worst-case scenario: you lose your job and interest rates rise when the recession subsides. Your monthly payments could go up, making it extremely difficult to keep up with payments. Late payments and defaults can negatively impact your credit score and make it more difficult to borrow in the future.
Accept debts
Taking on new debt – such as a car loan, home loan or student loan – doesn't have to be a problem in good times if you can earn enough money to cover monthly payments and still save for retirement .. But if the economy worsens, the risks increase, including the risk that you'll be laid off. If this happens, you may have to take a job – or jobs – that pay less than your previous salary, which could cut into your savings.
In short, if you are considering adding debt to your financial equation, understand that this could complicate your financial situation if you are laid off or have your income cut for any reason. Taking on new debt in a recessionary environment is risky and should be approached with caution. In the worst case, it could even contribute to bankruptcy.
Take your job to award
During an economic slowdown, it's important to understand that even large companies can come under financial pressure, causing them to cut expenses as much as possible. That could mean cutting back on Christmas celebrations, lowering dividends or cutting jobs.( See also, "Layoffs: Know the warning signs.")
Because jobs become so vulnerable during a recession, employees should do everything they can to make sure their employer has a positive opinion of them. Coming to work early, staying late and doing top-notch work at all hours is no guarantee that your job is safe, but doing these things will increase your chances of staying on the payroll.
Take risks with investments
This tip is for entrepreneurs. While you should always be thinking about the future and investing to grow your business, an economic slowdown may not be the best time to make risky bets.
For example, it may seem interesting to take out a new loan to expand physical space or increase inventory, especially since interest rates are likely to be low during a recession. However, if business slows down – another side effect of recessions – you may not have enough left at the end of the month to pay interest and principal on time. (See also "Top 6 Ways to Recession – Prove Your Job.")