How to Recession-Proof Your Money
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It can be difficult to know exactly how to translate all the talk about the economy and a potential recession with what to do with your money. While nobody can predict the future and recessions are notoriously hard to forecast, a new survey from Duke University of American CFOs says that more than half of them believe the U.S. economy will enter a recession before the 2020 presidential election. While that has massive implications for the economy as a whole, it can be difficult to know exactly what that means you should do with your money. Below I will break down what a recession means for you as an individual and how you can recession-proof your money so you’ll not only survive the next recession but ultimately thrive.
What is a recession?
Broadly speaking, a recession means a period of slower growth for businesses as a whole. In technical terms, a recession means that Gross Domestic Product (GDP) has fallen for 2 consecutive quarters, or 6 months. That is difficult to translate into personal terms, but it generally can mean slower wage growth, higher prices for consumer goods, and even the potential for lay-offs. However, recessions can bring a lot of positives to the average consumer if you’re smart with your money and know where to look.
What can you do to get your money ready?
Get your budget in line.
The economy is strong right now, and wages have been on the rise. In times like this, it can be easy to get a little lax with your budgeting and let your spending get out of hand. If you don’t know what’s going on with your money, you aren’t in control. You should control your money, not the other way around, so you need to get on a budget quickly.
If you wait until a recession starts and the money has already gotten tight, you are putting yourself in a bad position. Don’t force yourself to have to react to circumstances, create the life you want by being proactive with your money habits right now.
Pay off your debt.
As much as you can before a recession, you should pay down any consumer debts you have such as credit cards and personal loans. These tend to have high interest rates and could eat into your budget if money gets tight. By freeing up those financial and mental resources, you will be in a better position to make smart decisions during a recession.
Do nothing.
I know it seems counter-intuitive, but a recession is the worst possible time to panic and start fiddling with your investments. As a recession lingers on, the stock market will drop, and that can be scary. However, selling when the market is down will only lock in those losses and eliminate any possibility that you recover your money when the market goes back up.
Assuming you already have a solid financial plan in place for your investments, you will be perfectly comfortable weathering the storm of a recession and you’ll come out the other side in a better position for just holding tight. If you don’t have a solid plan or a strong grasp on your money, now is the time to get started. As the Chinese proverb goes, "The best time to plant a tree was 20 years ago. The second best time is now."
Build your emergency fund.
Recessions have the potential to bring slowing or stagnating wages, slashed benefits, or even lay-offs. Unfortunately, life doesn’t pause when your income does. By building your emergency fund before a recession, you will be in a solid situation to take care of those emergencies -- such as a car accident, a leaky roof, or a busted water heater -- and not have to go into debt when money is already tight.
Most experts recommend at least a $1000 emergency fund (a number largely borrowed from Step 1 of Dave Ramsey’s Baby Steps), but before a recession, it would be wise to bump that number up slightly. If you’re feeling worried, consider having 3-6 months of normal expenses sitting in the bank. That way, if the worst-case scenario does come and you lose your job, you can cover your expenses while you look for the next opportunity.
Have an opportunity fund.
Speaking of opportunities, recessions don’t have to be all doom and gloom and emergencies. Separate from your emergency fund, you should also set aside a little bit in an Opportunity Fund. After all, recessions often mean deep discounts on stocks and other investments.
When everyone else is panicking and selling the farm, you will be able to put more into your investments while everything is “on sale.” Warren Buffett used this exact strategy to make $10 billion during and after the Great Recession in 2008.
Shop around for deals.
Recessions generally mean deep discounts on interest rates. Banks and other lenders usually slash interest rates during periods of economic downturn to try and get consumers spending again, which means great deals for the well-prepared. Whether you were planning to buy a new house, get a new car, or just grow your small business, a recession can be a great time to do it.
It’s important to note that you should not take out a loan you cannot pay back (or one you weren’t planning on taking out anyway) just because the interest rates are low. However, if a recession happens to line up with a large purchase you were planning to make and budgeting for anyway, you can use the downturn to get a fantastic deal.
Make yourself indispensable at work.
Recessions tend to lead to lay-offs. Sometimes, you will get unlucky and there is nothing you can do to avoid losing your job, but there are often ways you can be the lucky one who weathers the storm. Before a recession, you should seek out ways that you can add value to your employer beyond just your normal gig. Ask to handle more high profile projects, take on responsibilities outside your normal role (assuming you have the time), and make sure you aren’t slacking off.
If you see needs within your company that you would like to fill, take the time to learn the necessary skills and offer to take them on. Enroll in a course on an online learning platform, or take a night course at a local community college. Your boss will likely have seen the need as well and be grateful that you’re stepping up to fill it. If you are taking this initiative before a recession, many employers will even cover the costs.
When a recession does roll around, your boss will remember the initiative you showed and all the bonus skills you have when deciding who to lay off.
Focus on the future.
Remember that recessions are temporary, and you shouldn’t make permanent decisions based on temporary circumstances.
If you can re-frame your thinking to focus on the bigger picture and your life 10 or even 5 years from now, you will be in a better mindset to make good decisions. Recessions present a lot of financial challenges, but by remembering that those challenges are temporary and sticking with your long-term goals, you’ll be able to not only weather a recession but also emerge from it in a better position than you were in when it began.
Conclusion
Nobody can say exactly when a recession will begin, or how long it will last when it does. Warning signs may be flashing, but it’s impossible to say for certain what will happen. By getting in control of your money now, setting yourself up for success, and focusing on the future, you will be able to recession-proof your money.
A recession may not come, but if it does, don’t you want to be prepared? And if it doesn’t, you’ll be in an even better position to crush it with your money and live a life that excites you.
If you want to get a handle on your money before a recession but you’re not sure where or how to begin, schedule a free consultation with me to talk about financial coaching and how I can help you stress less about money and live a life that excites you.