Brace Yourself for the Next Recession

There has been a lot of talk of recession lately.

Based on historical trends, we are overdue for a recession. Add in the fact that the President of the United States is considering starting trade wars over his advisers’ objections, and it becomes even more likely, according to economists.

Earlier this month, Jim Rogers told Business Insider that the “worst crash in our lifetime” will come in 2017 or 2018. Mark Faber is predicting a drop of at least 40%.

So what does that mean for you?

GoBankingRates recently conducted a survey of Americans to see how prepared we are for the next recession. Let’s see how we compare.

Cut Your Expenses

According to the survey, 49% of Americans are living paycheck to paycheck. Other surveys have found different numbers for this, but they are all disturbingly high.

If you are living paycheck to paycheck, it means that if you lose your job, you will immediately struggle to to make ends meet. This is apparently the case for half of all Americans.

And we could very well be approaching a recession in which a lot of people will be losing their jobs. (Something to think about before rooting for a recession.)

Whether or not you are living paycheck to paycheck, this is a good time to look at where you could cut your expenses.

Lower expenses means higher savings and lower exposure to a recession. It means that if you lose your job, you have a smaller gap to close. If you cut your expenses by $100/month, then that is $100/month less that you need to figure out how to earn after you lose your job. It is $100/month less that needs to come out of your emergency fund. It is $100/month more security and stability.

Sign up for a free service like Mint to track and categorize your spending. Look at where your money is really going and figure out where it makes sense to cut back.

Find some things that you’d rather not cut, but can if necessary. Most people have some subscription services or other unnecessary spending that they enjoy, but is not all that important. Flag it for immediate cuts in the case of a job loss to buy yourself some flexibility.

Build Up An Emergency Fund

The survey found that 61% of Americans did not have enough money saved to cover six months of expenses. Presumably this number has a lot of overlap with the 49% of people that are living paycheck to paycheck.

Now that you’ve cut your spending, direct the savings somewhere so that you don’t end up spending it on something else. If you don’t have a sufficient emergency fund, get to work on building one up.

Find some savings and move it into a savings account, even if it doesn’t feel substantial. Skip going out to dinner one night and transfer $30 from checking to savings. Pass on a coffee and put $5 into savings. If you can’t build up your emergency fund quickly, then do it gradually. Just make sure you do it.

How large your emergency fund is can be dependent on your situation. In a stable two-income household where the incomes come from different fields, you can have a smaller fund. If you are an individual in a less stable career or with a variable income, then you want a larger fund. If you have no idea where to start, six months of expenses is a safe number to target.

If you want a more in depth look at emergency funds, read more here.

Have an Income Plan B

64% of survey respondents did not have a secondary source of income.

I’m not as big of an advocate for side hustles as a lot of people in the personal finance world, despite having a few myself. I really think that you need to decide for yourself whether the extra time working is worth the extra money coming in.

Sometimes it absolutely is and you should go for it. Sometimes you’re better off having the free time to relax, have fun, and nurture relationships.

Either way, though, you should have a Plan B source of income.

If you lost your job tomorrow, how would you bring income in while working on getting another full time gig?

This may be an easy answer for the side hustlers. If you have something that you can just ramp up with all of your newly discovered spare time, then great!

If not, then think through what your fallback work would be. If you can’t think of any reliable fallback income, then make your emergency fund a bit bigger to make sure you have enough cash to last while you find a new job during a recession.

Be Ready to Look for Work

Speaking of finding a new job, the survey found that 74% of people were not ready to job hunt.

Don’t be in that group! The last thing you want to do after losing a job is start trying to think about how you should update your resume. Figure it out now and be ready to jump on new opportunities immediately.

Keep in touch with people. Offer to help wherever you can. If you have a reputation for helping others, then others will be willing to help you when you need it. When 10% of the country is looking for a job at the same time, you’ll want to have friends.

And on a more positive note, if you’re one of the ones that keeps their job while everyone else is looking, keeping strong relationships will allow you to know who is looking and get the best available folks to join your team.

I feel like it is hypocritical of me to tell people to get on LinkedIn. My LinkedIn profile is garbage and hasn’t been updated in years. But…get on LinkedIn. It is not as good as a personal connection, but it allows you to connect with more people than you could in person.

Don’t Predict The Market

After reading this I would imagine it is tempting to pull your money out of the market and wait for the crash. Don’t.

The market is unpredictable. People that spend all day every day studying investments haven’t been successful at predicting the market, so you and I don’t stand a chance.

I’ve been reading a lot about how a recession is coming soon, so it feels like that is the consensus. But it can’t be. If the majority of people thought that a market crash was on the horizon, they would be selling. The fact that the market is still climbing suggests that the majority of people disagree.

If you pull out of the market, you could miss a lot of gains. The market could climb wildly for years after you pull out.

The market will continue to go up. Until it doesn’t. And nobody knows when that will be.

Experts predicted that we would have a recession in 2016. And 2015. And 2014. And 2013.

So stick to your investment plan and take the other steps discussed to make yourself recession-proof. Build yourself a strong enough foundation that no market crash or job loss can harm you.

21 thoughts on “Brace Yourself for the Next Recession”

  1. It’s funny how many people have been talking about a huge recession lately. It’s definitely true that we’re overdue for a recession–the question is only when, not if. And this is why it’s so important to pursue FIRE in the first place: eliminating debt is so much more important when you’re in dire financial straits. You’re better prepared for the hard times.
    Mrs. Picky Pincher recently posted…What A Frugal Weekend! July 2My Profile

    1. I agree completely. I can’t imagine having to go through a recession without a stable financial footing. Not only could you lose your job, but you lose it in a period when everyone is looking for work and nobody is hiring. I’m glad we’ve saved up enough that we can weather that storm if it comes.
      Matt recently posted…Why I Save So MuchMy Profile

    1. I don’t have a problem with keeping money invested, but I also have no consumer debt, no mortgage, and no need for large amounts of cash in the near future. With a mortgage I can see where this might be a good time to throw some extra money in that direction. Especially if getting rid of PMI is within reach. That alone could be a solid ROI.

      Thanks for the comment, Erik!
      Matt recently posted…Why I Save So MuchMy Profile

    1. I get that. I have been tempted to steer more of my after-tax investments to cash. I try to comfort myself with the knowledge that if I had actually moved to cash when I first thought the market was going to crash I would have missed the last year of crazy growth.

      Thanks for the comment, Linda!
      Matt recently posted…As Happy as an Old PersonMy Profile

  2. Nice article Matt. I really liked the part about being prepared to job hunt. I didn’t think about that as much in the past either but making connections by networking and showcasing your skill sets to others could help you get a better job even if you aren’t actively looking for one right that moment.
    Thanks for breaking down the study.

    Tom @ HIP

    1. Thanks, Tom. I always hated the idea of networking because it felt too forced and self-indulgent to me. Fast forward to my current job and I’m here because people that I worked with previously vouched for my abilities. The more people that know your skill set and that trust your abilities, the better your chance of landing a new gig quickly.
      Matt recently posted…As Happy as an Old PersonMy Profile

  3. Solid advice. I am was relieved that you didn’t suggest going to an all bond portfolio or cash. Like you said I have been hearing about the next rescission for years while I just stayed put and kept getting double digit returns.

    I say all this but I am waiting to buy a rental until the market adjusts. Which may never happen. Money can be so confusing. Haha.
    Grant @ Life Prep Couple recently posted…New Year’s Resolution UpdateMy Profile

    1. haha I am in the same boat. I am continuing my standard investment habits on the stock/bond front, but at the same time I am debating building up some down payment savings so that I can buy if the housing market tanks. I think it is just human nature to try to beat the average even if we know we shouldn’t try.

      Thanks for stopping by, Grant!
      Matt recently posted…As Happy as an Old PersonMy Profile

  4. Wow, I never saw the Jim Rogers / Henry Blodget interview on the collapse. Jim was right years ago, and has been wrong for many years since.

    I’m personally deleveraging and diversifying into lower risk investments. I thought the markets would stall out in 2016 as well… and I guess there was a slow period. But wow… this year is off the hook!

    I’m going to write more defensive related articles and I’ve got my How To Engineer Your Layoff book which I think will explode in popularity if the recession hits! One can dream right? 🙂

    Sam
    Financial Samurai recently posted…How To Create Next Level Wealth: When A Million Just Won’t Cut ItMy Profile

    1. Yeah, I am glad that I didn’t switch to cash or bonds when I first thought the markets would stall out or I would have missed out on some crazy gains. My investments right now are entirely in total market index funds, so I figure there is no real need to change and I will just ride the ups and downs for now.

      And anyone who hasn’t checked out your book should get on it! Seems like the beginning of a recession when companies are trying to cut costs without getting bad press would be the perfect time to pull that off.

      Thanks for stopping by, Sam!
      Matt recently posted…As Happy as an Old PersonMy Profile

  5. It’s just a matter of when the market pulls back. I definitely had a bit of a scare during the last recession and made sure I had some funds available especially since government shutdowns loom from time to time. So I definitely didn’t want to get caught with my pants down again. Hopefully others will feel similarly 🙂
    Mustard Seed Money recently posted…The Undeniable Appeal of a New CarMy Profile

    1. Ugh…government shutdowns. Nothing like using public servants as pawns in your political power games. It does seem like we’re in an environment where we can expect shutdowns (or at least the treat of them) more often.

      Thanks for the comment, Rob!
      Matt recently posted…As Happy as an Old PersonMy Profile

  6. Excellent advice, Matt. People seem to forget about things like the 2008 housing bubble burst and the Great Recession that followed it. They are frugal for awhile, and then after they get comfy they just start spending again. They just don’t think it will happen again. I believe we’re in for something big, and soon.

  7. I am a big Boglehead fan and I know that I should just stay the course. It is easier said than done when it’s been 10 years since the Great Recession and a pullback is inevitable. It is tough not to tinker and move some money to the sidelines. It’s something I debate with myself pretty often. Looking back at 2008, I sometimes think…the signs were obvious that the economy would pull back! Hindsight is always 20/20. I feel like Jim Rogers and Marc Faber are perpetually predicting recessions. They may be right at some point but even a stopped clock is right twice a day. I have had a couple of friends “predict” that a recession was coming for the last year or two.

    1. I have battled with the same temptations. I’ve noted in other comments above that I comfort myself with the knowledge that I thought the market would drop last year. If I had followed my gut and moved into more cash, I would have missed the big gains we’ve had this year.

      Thanks for the comment, Andrew!
      Matt recently posted…As Happy as an Old PersonMy Profile

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