With all the current administration chaos, massive firings, and uncertainty, I’ve been thinking a lot about a recession and how important it is to prepare ahead, instead of defending when it’s here. For some people, they get caught up in the tide because they never saw it coming. Others learn to read the ocean and know when to get the hell out of dodge—or at least prepare for the wave to take them out to sea before they find their way back to shore.
A recession isn’t some abstract concept happening far away—it’s something that can touch your life in unexpected ways. It starts small, with people in your neighborhood, people you know, or even your own family. For example, imagine your neighbor loses their job and starts to spend less money at the local family-owned grocery store.
Then another neighbor loses their job, spending even less at the same store. Slowly, a pattern emerges: people start cutting back. Next, 10% of people in your city are laid off, and now the grocery store is more stocked than ever because no one is spending as much. At first, it might seem like a good thing—look at all the food on the shelves—but in reality, it’s a sign that trouble is brewing.
The grocery store may have plenty of stock, but when sales dry up, they can’t pay their vendors or keep up with expenses. When cash flow becomes limited, disruptions start to take shape. This can happen within a month, or it might take up to six months, depending on how much cash is in the bank account for them to weather the storm and pay their expenses like rent, vendors, etc.
If the hardship lasts longer than what’s in the bank and the grocery store can’t secure a loan, there’s a greater chance you’ll see your neighborhood grocery store shutter its doors
This isn’t an abstract economic concept; it’s happens right in your backyard. Recessions and economic downturns hit everyone, even when they don’t seem to. We saw this same pattern play out during the Wall Street crash of 1929 and the 2008 financial crisis.
The Wall Street Crash of 1929: From High to Low
During the Wall Street crash in 1929, the stock market was soaring. Everyone was living it up, thinking the good times would never end. People were buying on margin, and the wealthy were living in luxury. But when the market collapsed, everything unraveled quickly. Those same individuals who had been living in mansions and sending their kids to private schools found themselves desperate, selling whatever they could to survive. Within months, many of them were in soup lines, their once-flourishing lives shattered in an instant (Gottfried, 2021).
The 2008 Crash: A Repeat of History
Fast forward to 2008, and we saw the same kind of collapse, though with different causes. High-paid executives, real estate agents, and brokers were living large off the housing boom. When the crash came, it wasn’t just about financial institutions failing—it was about real people losing everything.
Million-dollar homes went into foreclosure, people were laid off, and suddenly the wealthy who had once been spending lavishly were cutting back, while the middle class found themselves in the same financial mess. The economic downturn led to widespread job loss—at its peak, the U.S. unemployment rate hit 10% (U.S. Bureau of Labor Statistics, 2010).
How the Ripple Effect Spreads
When the wealthy stop spending, the consequences are more widespread than most realize. Take a high-end furniture store, for instance. These businesses depend on the wealthier class buying expensive furniture, but when that stops, everything changes. The salespeople, the delivery drivers, the warehouse workers all lose their jobs. These aren’t just any employees—they’re often people living paycheck to paycheck. When they lose their income, they cut back on their spending, and the ripple spreads. The local coffee shop, the bookstore, and the family diner all feel the pain as the middle class tightens their belts.
And it doesn’t stop there. The job losses and shrinking incomes eventually reach down to the workers at these smaller stores. A small business owner who once thrived might suddenly be struggling to pay rent, unable to afford to keep their employees, and facing a financial crisis of their own. These changes are felt on a personal level—your neighbor might be out of work, your friend might get their hours cut, and suddenly it’s your family that’s affected. The downward spiral is real, and no one is untouched.
The Chain Reaction of Job Loss
When people lose their jobs, they stop spending. That hits businesses hard—especially the local, family-owned stores that rely on repeat customers. With less disposable income circulating, the local economy starts to slow down. But here’s the thing: it’s not just the ones who lose their jobs who are affected. When one person’s job disappears, it creates a ripple effect that touches everyone—whether it’s a neighbor, a friend, or even a family member.
The grocery store that once thrived now faces an excess of stock, and the business owner starts cutting costs, laying off workers, or shutting down altogether. Suddenly, the neighborhood you once knew starts to change—vacant storefronts replace familiar faces, and the lifeblood of the community is drained.
A Real-Life Crisis
Recessions aren’t something that only happen on Wall Street. They happen in our own backyards, and the effects can be felt deeply by people who never thought they’d be in a situation like this. It’s not just about the markets crashing—it’s about real people losing jobs, businesses closing, and families struggling. And the sad truth is, many people will be caught off guard by the suddenness of it all, unable to cope with the financial fallout.
But the key takeaway is this: understanding how the economy functions on a larger scale can help you prepare for the inevitable. Recognizing the warning signs and knowing how to adjust can make all the difference when the storm hits.
Behavioral Finance: The Impact of Cognitive Biases in a Crisis
When we’re talking about the ripple effects of a recession, it’s important to consider how behavioral finance—the study of how psychological influences affect financial decisions—comes into play. Cognitive biases like loss aversion, confirmation bias, and herd behavior often shape how people react in times of financial uncertainty.
For instance, during a downturn, many investors experience loss aversion—the fear of losing what they already have often outweighs the desire to gain more. This can lead to panic selling, even when staying the course might be more beneficial in the long run (Kahneman & Tversky, 1979). Similarly, confirmation bias can cause people to ignore warning signs and only focus on information that confirms their existing beliefs, making it harder to adjust when the situation changes.
On a broader scale, herd behavior can lead to mass panic. When people see others pulling back or selling off assets, they follow suit, even if it’s not the best decision for their personal situation. Understanding these biases can help you make better decisions during financial turbulence and, hopefully, avoid the kind of knee-jerk reactions that can make things worse.
What You Can Do About It: Preparing for Economic Turmoil (for those with more financial flexibility)
While economic downturns and recessions can feel overwhelming, there are steps you can take to better prepare for and weather the storm. Here’s what you can do to safeguard your financial well-being:
- Build an Emergency Fund
One of the most important steps to take during uncertain times is to build or strengthen your emergency fund. Having three to six months’ worth of expenses set aside can provide a safety net if you or someone in your household faces a job loss or an unexpected financial emergency. - Cut Back on Non-Essential Spending
Review your spending habits and eliminate or reduce discretionary expenses. Instead of splurging on luxury items or unnecessary purchases, focus on essentials—groceries, rent, and utilities. This shift in spending will help ensure that your cash flow stays stable during tough times. - Diversify Your Investments
If you’re investing, now might be a good time to reassess your portfolio. Ensure you’re not too heavily invested in one sector, and consider diversifying across different asset classes. This can help mitigate risk in case one industry or market faces a significant downturn. - Focus on Income Stability
If possible, look for ways to increase your income streams. Whether it’s a side hustle, freelance work, or part-time job, having additional sources of income can provide more financial stability during periods of uncertainty. - Understand Behavioral Biases
Knowing how cognitive biases like loss aversion and herd behavior can influence your decisions is crucial. By recognizing these biases, you can make more rational financial choices. Don’t let panic or fear drive decisions—consider long-term solutions and stay focused on your financial goals. - Maintain a Positive Money Mindset
Staying optimistic and proactive about your finances can help you avoid getting trapped in the cycle of fear-driven financial decisions. Focus on what you can control—your savings, budgeting, and investments—and remember that downturns are often temporary.
What You Can Do About It: Tips those with less financial flexibility (Low-Income Individuals and College Students)
While preparing for economic uncertainty can feel daunting, there are steps you can take—even on a tight budget—to strengthen your financial situation and reduce stress during tough times. Here’s how you can navigate through economic turmoil if you’re living on a low income or balancing college life:
- Maximize Your Student Benefits
If you’re a college student, take full advantage of any student benefits available to you. Many colleges offer access to free or discounted services, including counseling, career resources, or even food pantries. Don’t hesitate to tap into these resources to save money and reduce expenses. - Create a Tight Budget and Track Expenses
Budgeting becomes even more important when money is tight. Track every penny you spend and make sure you’re prioritizing essential expenses—rent, food, transportation—while limiting non-essential purchases. Use apps like Mint or YNAB (You Need a Budget) to keep a close eye on your spending. - Build a Small Emergency Fund
Even if you don’t have the luxury of a large emergency fund, aim to put aside even a small amount regularly. Start with as little as $10 or $20 a week. Over time, it can help cushion unexpected expenses like car repairs or medical bills. - Look for Side Hustles
Many college students find part-time jobs or side gigs to supplement their income. Consider freelancing, tutoring, babysitting, or working a flexible gig through platforms like Uber, DoorDash, or TaskRabbit. You don’t need to work full-time, but small gigs can make a difference. - Reduce Your Food Costs
Eating on a budget is crucial for college students and low-income individuals. Stick to cost-effective meals—think rice, beans, pasta, and vegetables—while planning your meals around store sales. Consider using your local food bank or community resources if you’re struggling to afford groceries. - Take Advantage of Government Assistance
Explore eligibility for programs like Supplemental Nutrition Assistance Program (SNAP), housing assistance, or Pell Grants if you’re a student. These programs are designed to help individuals with limited financial resources, so don’t miss out on any support available to you. - Avoid Unnecessary Debt
It’s easy to fall into the trap of using credit cards to make ends meet, but debt can quickly pile up—especially with high-interest rates. Avoid using credit for non-essential purchases and look for ways to get by without taking on more financial burden. - Focus on Long-Term Financial Health
While short-term survival is important, take time to think about your future. Even as a college student or someone with a low income, start setting long-term financial goals. Saving for retirement (even if it’s just a small amount) or contributing to an emergency fund when you can will put you in a better position down the road. - Stay Mentally and Physically Healthy
Financial stress can take a toll on your mental and physical health. Make sure you take care of yourself by staying active, eating well, and managing stress. College counseling centers or community groups often offer mental health resources that can help during difficult times.
References:
Gottfried, D. (2021). The Great Depression and its legacy. History Press.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291. Retrieved from https://www.jstor.org/stable/1914185
U.S. Bureau of Labor Statistics. (2010). The unemployment rate during the 2008 financial crisis. Retrieved from https://www.bls.gov/cps/cps_aa2010.htm
The Broke College Student 
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