How to make yourself recession-proof
Are we in a recession? It turns out this question is so controversial that Wikipedia recently had to turn off edits to its “Recession” page. People were getting into arguments around what a recession actually is and kept writing over each other.
Recessions are common in our history. Since World War 2, we’ve experienced 12, an average of a recession every 6 years. Of course, sometimes they are closer together (like 1980’s and ‘81’s); sometimes they have more than a decade between (like 2009’s and 2020’s).
Each of these had at least two things in common: falling “Gross Domestic Product” (GDP) and rising unemployment. The economy shrunk, and jobs were lost because of it.
The period we’re in right now is very unique. It appears the economy has contracted two quarters (a common rule of thumb), but the job market is doing quite well. Fewer people are receiving unemployment checks now than before the pandemic, back when the economy was exceptionally strong. If this is a recession, it’s a very strange one.
There’s more to do than fear what you can’t control. Whether economists agree on the definition doesn’t matter much. The important question is, “What does this mean for me?” Is there something to be afraid of right now?
In the big picture, small downturns may actually be helpful. There are several ways recessions are beneficial to the economy. But for those impacted the most directly, it still hurts. So it is understandable that people are concerned the “recession” word is being brought up again. Many still have trauma caused by the Great Recession fourteen years ago.
It’s impossible to predict how you’ll be impacted in a downturn, but you can still prepare now. Instead of worrying, take action by using the time-tested financial principles that have served people in every generation through every economic condition.
Your recession survival kit: in particular, these are the specific principles that are most helpful for surviving periods of economic crisis:
1. Build cash reserves (Principle #3). A healthy savings’ balance helps you through all kinds of crises. Keeping too little cash is one of the most common mistakes people make, and saving is a 21st-century survival skill. If you’re living off retirement investments, money in reserves can buffer you from bad markets. Savings can help you weather emergencies like losing a job. Cash can also help you take advantage of opportunities (such as buying an asset cheaply), which often come up during recessions.
2. Diversify investments (Principle #5). Concentration can create wealth, but diversification preserves it. Each economic crisis hits a different part of the economy. In 2008, the real estate market tanked. In 2020, home prices flourished. If you focus too much on the last downturn, you’ll most likely misunderstand what’s coming next. Rather than trying to predict which investments will do best in the short-term, we’ve found it’s best to keep multiple kinds of investments long-term. This line of thinking has ancient roots.
3. Avoid debt (Principle #2). There’s good debt, and there’s bad debt. But all of it reduces your flexibility. Minimizing debt is a great way to reduce what you will need to pay out in the future, so if you’re worried about your economic prospects, approach debt cautiously. We encourage every family to have a specific timeline of when they’d like to be debt-free and a plan to achieve their financial goals.
4. Think long-term (Principle #4). When times get difficult, it’s easy to think things will never get better. That’s when people make hasty decisions and sell investments at the worst time. However, those who have a good long-term plan are positioned better to take opportunities when they come along. Short-term thinking leads to regrets. Long-term thinking leads to big things.
Will these (and the other three Principles I left out) make you completely recession-proof? No more than wearing a seatbelt guarantees you’ll never be in a car accident. However, they’re your best approach for taking action and being prepared.
Need help getting a plan in place? We’ve helped hundreds of clients prepare for – and weather – recessions. Reach out to us today to schedule an initial consultation with one of our financial planners.
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