What are some Impacts of a Financial Crisis?

As the COVID-19 pandemic unfolds, economists predict that a huge economic crisis is at hand, leading people to ask, “What are some impacts of a financial crisis?” The impacts are both individual and geographical in nature. Understanding the impacts and how they can affect both a person and a society is key to taking action and dealing with the stressful situation.

Increased Income Inequality

Financial crises often magnify income inequality between women and men and between people of color and non-Hispanic Caucasians. People who were already wealthy going into the crisis have a much better chance of coming out of the crisis relatively unscathed. People who enter a national or worldwide financial crisis barely making ends meet often end up not being able to make ends meet. They might have to take two or three part-time jobs in order to pay their bills. In many financial crises, the end impact is the rich get richer or stay rich while the poor become poorer.

Less Likely to Take Risks

After coming out of economic crisis, individuals are less likely to invest in anything that is remotely risky. Investments, such as the stock market, have inherent risks. They also have more potential for growth. A person with a low risk tolerance because of past financial losses and the stress of a crisis might not have as much success in their investments for retirement. They might be more likely to put their money into a low-risk, low-return fund, such as a certificate of deposit or a simple savings account. These investments rarely keep up with the rate of inflation, causing them to lose money over the long haul.

Reluctance to Make Big Purchases

A person who has lived through a serious economic crisis is less likely to make a big purchase, such as a home. Buying a home requires a considerable level of confidence that the individual will have a steady income that will allow them to make their mortgage, taxes, and insurance payments. People who already own a home and have to live through a widespread economic crisis are less willing to take out loans in order to improve the property. They make stick with only making necessary repairs, not upgrades.

Fewer Babies

A surprising effect of financial crises is a drop in the birth rate, explains the World Economic Forum. In the United States, the cost to have a baby in the hospital is in the tens of thousands of dollars. Even if a person has health insurance, they will still pay thousands of dollars out-of-pocket. A person who is pessimistic about their financial future is likely to take measures against pregnancy. When many people feel pessimistic, the overall birth rate drops. In 2006, the birth rate in the United States was 2.1. After the 2008 recession, the birth rate fell to 2.0, and by 2016, it dropped to 1.8.

Getting through an economic crisis is stressful for an individual as well as for a society. The usual ways of doing things may no longer be feasible, and change can be difficult and frustrating. Knowing the answer to, “What are some impacts of a financial crisis?” could help a person or a society know more about what to expect and take actions in order to prepare psychologically and financially.