By now, you’ve probably heard the word ‘recession’ a lot—along with talk of job losses, stock market dips, and shrinking consumer spending. Although it sounds daunting, historically– some of the world’s greatest innovations came after past recessions.
We can’t control what’s happening around us, but we can control how we respond to our circumstances.
As people, we can do hard things. So what’s not to say we’ll come out of this stronger than ever?
Know what’s within your control and use this knowledge to help you weather through this period of economic uncertainty. We’re here to help you understand what recessions are made of and create a plan of action.
- A recession is a temporary period where the economy slows down because the Gross Domestic Product (GDP) or total market value of all goods and services produced by a country decreases.
- During a recession, focus on what’s in your control. Create a plan to maintain your financial health by lowering your expenses or increasing your cash flow.
- Consult a financial advisor about any investment activity you’re considering, including buying a house or selling an investment at a loss.
What is a recession?
In simplest terms, a recession means that the economy is in a slow down or dormant phase, where unemployment rises, prices of certain items like gas or food increase, and company stock prices drop.
Recessions hit us when the Gross Domestic Product (GDP)–the total market value of all goods and services produced by a country within a specific time frame—shrinks for 6 months. If you hear people talk about “inflation”, this means your dollar has less buying power today than it did yesterday due to the higher cost of the item in demand.
The good news is, these are recurring and natural cycles of our economic and business reality, so as proven by history– we’ll see a growth phase again in the future.
How will a recession affect my investments?
During a recession, investments in stocks, bonds, and any other asset can lose their value, decreasing your net worth. When consumers tighten their wallets, company sales dry up. When company sales dry up, the value of these companies (aka their stock prices) drop.
The important thing is that markets do rebound, especially if you have a diversified portfolio and a long-term investing mindset. So if you’re considering selling your investment at a loss, try your best to wait it out, if you can.
TIP: If you’re keen on investing as stock prices drop, consider adopting a more conservative investment strategy called dollar-cost averaging. This is where you invest a fixed amount regularly regardless of the ups and downs in the market vs. investing all your funds at once.
Either way, talk to a financial advisor to identify unique buying opportunities if you’re ever unsure.
What about real estate?
Real estate is also vulnerable, particularly when mortgage interest rates climb, and potential buyers scatter. People’s wobbly faith in their job security may also stop them from rushing out to bid on their dream home, knocking down house prices even more.
If you already own property, stay the course, if you’re able. Markets always come back.
If you’re looking to buy, you may find a bargain, but don’t overextend yourself. Remember those interest rates, and talk to a mortgage broker before making your move.
What are the tax implications of selling my assets during a recession?
If you sell off an investment and make more than you originally paid, that’s a capital gain. In Canada, you must claim 50% of that sum as part of your taxable income. If you sell at a loss, you can offset any capital gains you made over the last 3 years.
For example: Last year, Joanne sold shares costing $1,000 for $2,500, which generated a capital gain of $1,500. She had to report 50% of the gain, ($1,500 x 50% = $750), onto Schedule 3 of her income tax return.
This year she sold shares costing $2,200 for $1,000, which generated a capital loss of $1,200.
Since Joanne has to report 50% of the loss, ($1,200 x 50% = $600), onto schedule 3, she can apply the $600 against her capital gain of $750 from last year, using schedule T1A.
As a result, last year’s net capital gain will be reduced from $750 to $125. Joanne will receive a refund for any tax she paid on that gain once the CRA processes the adjustment.
What if I sell my real estate investments?
With regard to real estate, if you sell your principal residence, which is the main home where you and your family live throughout the year, you don’t have to pay capital gains taxes thanks to the principal residence exemption.
NOTE: To qualify as a principal resident, your property has to be a housing unit like a house, cottage, condo, mobile home, etc, that you, your spouse or any of your kids have actually lived in. See what qualifies as a principal residence here.
Investment properties such as rental properties you own, on the other hand, are taxable. So before making any decisions, it’s always a good idea to talk to a tax expert.
Three tips on how to reduce your capital gains tax
4 financial tips to keep you afloat during a recession
1. Build your emergency fund
Having an emergency fund to ride out uncertain market conditions can offer you the peace of mind you deserve as well as an improved credit score from paying your bills.
Exactly how much cash should you stash for a rainy day?
Most experts suggest a 6-month cushion as a comfortable minimum. Figure out how much cash you need every month to live, and then multiply that figure by six to get a good idea on how much money you need to save. Using free budgeting apps like Mint can help manage your budget and calculate your net worth so you always know where you stand.
Take it one step further and think about how you can earn extra money. Perhaps you have an empty bedroom you can rent to a student, or there’s a skill you have that can be turned into a side hustle?
This is your sign to start!
2. Avoid racking up debt
During a recession, racking up debt on your credit card can create more problems for you. Credit cards have notoriously high interest rates, which makes servicing those debts even harder. Channel your inner Marie Kondo to tidy up your spending habits before splurging on any big purchases that fall outside your budget.
3. Pay off existing debt
Prioritize paying off any outstanding debt you owe by making a record of how much you owe, where the debt is coming from, and what the monthly minimum payment is.
Whether you choose to pay off the smallest debt first, combine all your credit card balances into one monthly payment for a lower interest cost, or tackle the debt with the highest interest rate, it’s never too late to create a repayment plan to help you gain debt freedom.
4. Keep a budget
Keeping track of your expenses is eye-opening, especially with easy-to-use budgeting software such as Mint. The last thing you want to do is spend more than you make. A budget is also a good way to identify where you can cut back and save.
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