WHAT TO DO IN A RECESSION
Our Top 5 Things You Must Do to Prepare
The thought of another recession looming can be a pretty scary thing. The fear is real; especially with so many things happening around us that impact our finances and our ability to take care of our families. Having been through the last recession – we understand and so we wanted to provide you with a guide to help you prepare for a recession.
These are our TOP 5 ways to help you get ready.
1. Assess Your Financial Health
The very first step to getting your finances ready for a recession is to asses your financial health. What this means is that you need to know what you have (your assets) and what you owe (your liabilities).
This is also the time to honestly analyze the stability of your future income. Is your job at risk? Are your hours at risk? What is the health or your company?
These are hard questions, but necessary. Especially if you 100% rely on your income to pay your monthly expenses.
What will you do if you are laid off?
Can you readily find similar employment?
If you are at risk of a lay-off, in addition to asking yourself the above questions, now is a good time to do the following:
- Update your resume and cover letter templates
- Create a list of potential future employers
- Brush up on your skills
- Take any courses that will make your more marketable
- Update LinkedIn and Indeed profiles
- Confirm and update your references
- Consider side-hustle options
- Explore the option of becoming a contractor or consultant in your current field
- Reach out to colleagues and recruiters in your field to assess potential leads
- Communicate with a spouse or significant other to devise a plan and to make sure you are both on the same page
- Evaluate whether or not now is the time for a career transition
- Determine what other skills you possess that are transferable
Fully Funded Emergency Fund
At least one fairly prominent financial “guru” recommends you have only a baby emergency fund in place if you still have debt. While this may be acceptable when we are in a strong economy, otherwise, it is simply not sufficient. A $1,000.00 baby emergency fund will not last long if you have been laid off or have had your hours significantly reduced.
That’s why we recommend, at a minimum, your goal for an emergency fund should be at least three to six months of expenses, but preferably larger (12-24 months if you are self-employed).
Now, you may be thinking that having that much money saved up is an insurmountable task. Our suggestion is to not focus so much on the numbers, but focus on the act of saving. Every bit you can save now is putting you in a much better position as a recession approaches.
Assess Your Spending
This is also a good time to review your current spending. Life has a tendency to sometimes drift on auto-pilot. With that comes lifestyle creep. We don’t check our spending as often. We decided to get take-out one too many times a week. We give in to urges to engage in “retail therapy.” We rationalize our spending.
Take a look at the last couple of months of spending. Determine what areas you can tighten up. Also, review auto-debits. Can these be reduced and/or eliminated?
2. Shore-Up Your Cash Reserves
Once you have assessed your financial health, the next critical step is to begin shoring up your cash reserves. Shoring up your cash reserves needs to be your primary concern right now. A fully-funded emergency fund is what will carry you through an economic crisis, help you provide for the needs of your family in case of a reduction in income and will also allow you to help others more freely – if the desire and need arise.
Now, if you already have a healthy emergency fund and you are fairly certain that your job is safe, then the bulk of this article is not for you. If you are primarily concerned about what to do with your investments – then, you can likely skip to #5 Should I Be Investing Right Now?
For the rest of you, we think there are several steps that you can take to shore up your cash reserves faster.
What Do You Have That You Can Sell?
Purge. What do you have around your house that is not being used, has been outgrown or you simply don’t enjoy anymore? Selling these things is a good way to get a little bit of quick cash to put into your emergency fund. It will also feel good to get rid of a little clutter.
Review Your Debt – Suspend Debt Snowball
If you have debt and are reducing it via a debt snowball or a debt avalanche strategy – it is time to temporarily suspend these.
Other financial experts may disagree with me on this point. However, having gone through a recession and having lost everything – if you do not have a fully-funded emergency fund, you are putting yourself and your family at risk. ANY extra-money you have right now will be better spent going into your emergency cash reserves.
Understand, this is an exceptional time. We would not advise you to do this under normal circumstances. Look at it this way. If in 12 months, the economy appears to have steadied and you are certain your job is not at risk, you will have a nice sum of cash sitting there to put against your debt if that makes you feel better.
Divert All Extra Money to Savings
Any extra money you have should be diverted into your savings until you have your emergency fund fully funded. This not only includes the money you were using for debt snowball, but this also includes any extra money you were putting into retirement.
Keep funding your retirement, especially if your company provides a match, just divert any extra contributions you have been making. Divert that extra portion to savings. You can switch it back once your emergency reserves are fully funded or the economy stabilizes.
Some experts view a Roth IRA as an acceptable form of an emergency fund because you are able to access your contributions without penalty before age 59 1/2. If you are interested in this as an option, then do your research first and make sure you understand the pros and cons of doing so.
Negotiate and Communicate with Creditors and Other Obligations
Another way to cut some of your expenses, even if only temporary, so that you can divert this money to your cash reserves, is to communicate with your creditors. I think, especially amid this current pandemic, creditors are willing to negotiate and some may even suspend payments for a time.
I would caution to fully understand what you are agreeing to. Determine when these funds will be due. Ask if they will be added to the end of the term or spread out over a period of time. Find out if they are simply forgiven or if you will have to pay a lump sum. In every circumstance, get your agreement in writing and make sure you understand the agreement.
Review your insurances or other regular obligations and attempt to get a rate reduction. No one will cancel you for asking. They would rather keep a customer than have a customer defect to a competitor for a lower price.
Focus on Big Expenses
If you are able, focus on the bigger expenses. Typically, housing, transportation, and student loans take bigger percentages of our budgets. Because of this, cuts in these areas will provide bigger savings.
For instance, if you can rent out a room in your home that is not being used you can significantly reduce your housing expenses.
Many student loan companies understand the impact of the current pandemic and will suspend your payments for a time. As talked about previously, be sure you understand what you are agreeing to and make sure that it is in writing.
Don’t Forget That the Small Expenses Add Up
Getting big savings by cutting our largest expenses is great, but don’t forget that small expenses add up too.
What Can You Get For Free
Finally, consider looking into what you are able to get for free right now. As with student loan companies who are willing to suspend payments temporarily, there are also many companies that are providing their services at no cost for a time.
What subscription services are you paying for unnecessarily right now?
3. Research What Programs You May Be Eligible For
In the event of a layoff, it will be important to know if you are eligible for unemployment insurance. If not, are there other options available for you.
If you are unable to pay rent due to the current crises, have you discussed with your landlord how this will be handled? Do you understand it and is it in writing?
If you are self-employed and need assistance, determine what programs you may be eligible for and what will be needed to apply.
4. Determine Your Worst Case Scenario
No one ever wants to wind up in a “worst-case scenario” but going through the exercise of imagining what you would do in the event of a worst-case scenario is important.
It forces us to examine where we are and think outside of the box.
Here is an example of our worst-case scenario:
If Curtis were to lose his job and I was not able to make enough from my businesses, we have a couple of stable sources of income that can support our family, but not in San Diego. We currently rent, so we do not have to worry about a mortgage. So, our worst-case scenario is that we would have to move out of state where we could survive on our other income.
This is not what we want, nor is it ideal, but IF the worst-case scenario were to happen – we could do it. We have a plan and it provides us with security.
Once we have built our emergency fund up to 12-24 months of expenses – our worst-case scenario would mean we lived off our savings until we could make more income.
Take some time now, include your spouse or partner if applicable, and come up with a few worst-case scenario contingencies.
This should hopefully give you some reassurance that you know what to do if you absolutely need to.
5. Ask – Should I Be Investing Right Now?
Currently, the market is in a decline and many investors are excited because this is an excellent opportunity to buy when the market is at a discount.
It is hard not to get caught up in the hype; I admit to having had some serious FOMO (Fear of Missing Out) about missing a great time to invest.
Our suggestion, however, is to resist the urge to jump in the market unless your financial reserves are where they should be. If you do not have enough in your emergency fund, then any extra money you have should be saved – not put at risk. Yes, in the long run, you may reap a reward, but as we have discussed before, the market is a long-term game. There will be another opportunity for you to invest.
Because our emergency fund is not yet at 12 months worth of expenses we are putting any extra money we have into savings – not the market.
We will continue to dollar-cost average into our retirement accounts via payroll deductions. We still get to take advantage of the market, but we are also building up our reserves.
If you are financially secure and your accounts are healthy, then sure – by all means – take advantage. Invest a lump sum if you have it or continue to dollar-cost average if that is your strategy.
We know that the uncertainty of what is happening in the world can be stressful and emotionally exhausting. We understand.
In 2008, we lost everything in the last recession. It was a terrible time. But we came through it. We rebuilt. We survived and this time around we are in a MUCH better place thanks to all we have learned by becoming involved and active in the Financial Independence community.
We believe these tips are what will help you come through the next recession in a financially healthy place. At a minimum, you will fare better had you not taken them and at most – you can expect to be more financially secure than ever before in spite of a recession. We hope that it is the latter.
Love and Prosperity,
Wendy and Curtis
DO YOU NEED HELP
GETTING YOUR FINANCIAL HOUSE IN ORDER?
We have created a 130 page bound workbook and journal.
This workbook will take you step-by-step to get your financial house in order.
You will determine what you are spending your money on, where you can find savings, how to pay off debt quickly and save more money.
If you want to get a firm financial foundation to start your Financial Independence journey, this workbook was created with you in mind.
These are the same strategies we used to get rid of over $650,000.00 and debt, reduce our monthly budget by thousands and buy 4 investment properties that cash flow over $1,000.00 a month!
Another really great tool we have to get you started is the FREE 7 Step Money Foundations e-mail course.
We created both of these resources with you in mind.
ADDITIONAL RESOURCES TO STAY ON BUDGET? KEEP READING…..
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WAYS WE STAY ON BUDGET
We use Personal Capital to keep track of our Net Worth, Debt Pay-off and Our Retirement Account Balances. It’s a good place for us to map our progress and see where we need to make adjustments.
What we like about M1 is that they allow the purchase of Fractional Shares and a high yield checking account. It’s a great way to start investing when you only have small amounts to begin with.
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