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.
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.
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.
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.