If you’ve been watching the news listening to the media, there are signs of a recession coming. At least that’s what everybody claims. There’s always someone predicting that one is coming. And, eventually, somebody’s going to be right. According to Forbes, the US is 4.5 years past due for a recession. I’m not qualified to predict a recession, and few people are. It’s best to stay prepared, no matter what the media or the news is saying.
With that said, I’ll explore how to prepare for the 2020 recession before it occurs. Let me say this real quick. I’ve seen lots of social media posts lately with people excitedly waiting for the recession so they can scope up some prime real estate or snatch up discounted stocks. Although it’s true that it is possible to make money in a recession, it’s not cool to hope for one to come sooner than it has to.
It’s just insensitive. During recessions, people lose their jobs and homes. Suicide rates spike. If the next recession is anything like 2008, there will be some tough times ahead. Especially for those that are struggling financially before the recession hits. But with the proper preparation, it’s possible to come out on the other end of the recession, better off than when you started. So now for those tips I promised…
8 Ways to Recession-Proof Your Finances
Tip #1: Solidify your emergency fund.
You’re probably saying, ‘Yeah, yeah, yeah Nicole’, you’re always talking about this emergency fund. And this would be a true statement. But I’m constantly talking about it is because the emergency fund is super important. It’s important when times are good, but especially important, when times get hard. You can begin with a goal of $1,000 to start and continue to add to your fund as your cash flow allows. A minimum of three to six months of core expenses is the eventual goal. But, a year’s worth of expenses in savings would be amazing.
Tip #2: Draft your ‘scorched earth’ budget.
Your scorched earth budget is very different from your regular operating monthly budget. The scorched earth budget should be free of all of the discretionary things that we spend money on when times are good. The scorched earth budget is basically all about being able to support your four walls, keeping a roof over your head, and food on the table during tough times. When things are going well financially, our budgets become inflated with things that are nice, but not necessary. But during tough times, the fluffy discretionary items (think private yoga lessons and gourmet coffee) are first up on the chopping block.
My suggestion? Don’t wait until times get hard to figure this out. Take a few moments now to figure out the minimum monthly amount of money need to keep your household running per month. Calculating your scorched earth budget makes it easy to tabulate what you’ll need to save in your emergency fund.
Tip #3: Ditch debt.
Getting rid of debt is ALWAYS a good thing, regardless of what’s going on with the economy. By prioritizing debt, especially debt those with high interest, you’ll free up more cash to eventually save and invest. The two most common strategies to pay off debt are the debt snowball and the debt avalanche. To create a debt snowball, simply list all of your debts from smallest balance to largest balance. Next, pay the minimum monthly balance on all debts except the smallest. You will then focus on throwing all extra cash at the smallest balance until it’s paid off. After paying off the smallest payment, you’ll roll or snowball that payment onto the next smallest debt and repeat. The debt snowball strategy gives you a quick, psychological win and motivates you to attack the next debt on the list.
On the other hand, the debt avalanche approach is when you prioritize paying off the debt with the highest interest rate first. The debt avalanche is the strategy that makes the most sense by the numbers because you’ll save more money by paying less interest on your outstanding debts. But it takes longer to see results with a debt avalanche which can be discouraging. But regardless of which strategy you opt for, now is always the best time to rid your life of debt. And taking that step to do so is one of the first steps towards financial freedom.
Tip #4: Get comfortable living on less.
Don’t wait until you’re forced to downsize your life because things are going wrong financially, or perhaps you get laid off from work. Instead get comfortable living on less even now, when the stakes aren’t as high. In my own life getting comfortable with less is a continual process. It’s something that I continue to work through. Being comfortable with less is directly connecting to contentment. As I practice gratitude, I’m frequently reminded that I don’t require many physical possessions in life. And the less stuff I have, the less time and energy I need to spend maintaining it all.
Tip #5: Master the art of this side hustle.
This is one of my favorite tips of all time! I’m all about that side hustle life and there is a time in a season for it. Sometimes there’s a season to lay back and just relax and enjoy free time. And in other seasons, it’s a time to get your hustle on. Only you can decide what time it is for you. But with a possible recession approaching, this might be a good time to ramp up your side hustle efforts. And I truly believe that regardless of how much money you make in your day job, everybody could benefit from a side hustle and income diversification. If you recall, the economic downturn of 2008 is when the gig economy really started to take off. People realized that jobs are not loyal, you have to look out for number one. So that if your job goes ‘bye-bye’, you’ll be doing just fine.
Tip #6: Save, save and then save some more.
Did I mention that you should be saving? If you are not a natural saver, then you can start to do some things to kind of trick yourself into saving more money. One of the benefits of having more money in liquid savings during the recession is that one, your emergency fund will be solid. And two, you’ll have some money around so that you don’t have to sell off any of your investments during the economic downturn. If you have all of your money currently tied up in investments, such as a 401k, Roth IRA, or index funds, you may have to sell off those assets at a loss in order to keep the bills paid during a recession. To avoid being forced to sell your assets at a loss, keep a healthy cash cushion on hand. After the emergency fund is solidified keep a separate wealth-building account on hand so you can throw money into the stock market when stock prices are low.
Tip #7: Invest strategically and continuously.
Every day is a great day to invest. This is true even in the midst of a recession. It’s not about timing the market. But if you are able to buy stocks at half price, why would you not do that? But regardless of how the market is doing, I always recommend investing continuously. Of course, if you’re approaching retirement, be sure to consider this in your asset allocation. But the best way to outpace inflation and to protect the buying power of your dollars is to invest in the stock market and take advantage of compound interest. If you’re a beginning investor or haven’t gotten started, it’s natural to feel intimidated or even scared. But make a commitment to #doitscared.
Tip #8: Stock up on household items and food.
I’ll admit it. I low-key want to be a doomsday prepper. But you don’t have to be a doomsday prepper to reap the benefits of stockpiling. A well-stocked pantry and a well-stocked deep freezer can come in handy during difficult financial times. So when times are good and you have more cash on hand, pick up extra things that your family uses consistently. Start with items like toilet paper, soap, toothpaste, bottled water, and canned goods. And if your budget ever gets tight because of a recession, these supplies will help to keep you and your family afloat.
Final Thoughts:
I don’t know if a recession will happen in 2020 or not. But what I do know is this. Having a solid financial foundation is ALWAYS relevant.
If a recession hits tomorrow, would you be ready? Which of these tips do you need to work on the most?
These suggestions are really helpful. I have a scorched earth budget prepared for a while now. I call it My Extreme Retrenchment Budget – a nice big name to go with extreme effort required to endure the restrictions of that regime!!! My heart fails when looking at it but I have been trying to psyche myself into giving it a trial run. If I do it for a year I will save about $40000 on my current income.
By the way, I recently found your blog and I am reading through it. Your postings are top-of-the-line.
Thank you so much! I like that…Yeah it’s super important to know those core numbers as you prepare to save.