There’s no question that the last several years have ushered in amazing gains in real estate and the stock market. People are making money hand over fist. That part’s great. But, there’s also no question that it won’t last forever.
Google S & P 500 graph and you’ll get a pretty picture (literally):
Since 2016, it’s pretty much been one long uphill climb – for the exception of a blip in 2019, things have been pretty darn great.
Folks are making money. The employment rate is high. What’s not to love?
The market is one of those things that ebbs and flows.
Right now we’re in a good cycle, but we won’t always live in a financial environment where making money is darn close to automatic.
Things change. Company stocks plummet. And, there’s more and more evidence that suggests that our incredible economy is cresting.
It’s a perfect time to step back and take a look at our own personal situation to make sure we aren’t setting ourselves up for a potential disaster once the other shoe drops.
How do we do that?
Here are 5 important things to do ahead of the next recession
1: Start (or expand) an emergency fund
The #1 most important factor in financial stability is establishing a financial buffer. Period.
Emergency funds are designed to provide enough quick cash to pull you through unexpected financial shortfalls.
- a sudden job loss
- an unexpected medical bill
- a huge car accident that requires repairs
- a new roof because your old one just sprung a leak
You get the idea.
Big expenses that you didn’t count on. And, an emergency fund – especially in times of recession or economic stagnation, enables us to pay cash for things that we might otherwise fall into credit card debt to fund.
More on debts a bit later in this article.
What to do: If you don’t already have an emergency fund, start one. Start putting aside a certain percentage of your paycheck every month in an interest-bearing savings account, like Ally. Start small if you need to.
The key is, if you don’t have an emergency fund, to start.
If you already have an emergency fund, good for you! But, make sure that you’ve saved at least six months of living expenses. If you haven’t, consider increasing your monthly contributions until you’ve hit that mark.
Six months gives us plenty of time to recover from most unexpected financial burdens.
2: Ensure your lifestyle is sustainable
Quick, answer this question: How much money are you spending, in total, every month. Do you know?
If you’re like most people, you might not have a good idea of exactly how much you are spending. Remember, your spending includes things like:
- mortgage or rent
- insurance (home and auto)
- subscriptions (magazines, etc)
- memberships (gyms, etc)
- habits: morning coffee, movies, drag racing, etc
Expenses quickly become insidious, and for many of us, it’s tough to track exactly how much we are spending…and most importantly, on what.
Knowing where your money is going is the secret sauce for controlling your financial situation. The “where” is just as important as the “how much”.
A sustainable lifestyle means that if we suddenly lose a job or if our investments drop, our lifestyle won’t suffer a sudden and dramatic cut.
Deciding whether or not your lifestyle is sustainable is often the toughest step. And, it all starts with figuring out where our money is going.
What to do: Use your credit card and bank statements and categorize each and every expense. Take special note of any automatic membership or subscription deductions and confirm that you’re still using those things.
For example, subscriptions to magazines that we no longer read or care about are common, and unless we reach out and stop them, they will very often continue coming out of our bank account.
Then, as yourself a question: When the recession hits and my investments drop by 50%, will my lifestyle dramatically change? If so, what will I cut, and by how much?
3: Pay off easy debts
It’s often not fun to think about debt, but while you’re making money and gainfully employed in a good economy, it’s smart to use that advantage.
Are there any debts that you could easily pay off with two or three paychecks? If so, consider getting rid of those debts now when you probably won’t miss the temporary decrease in discretionary spending.
When the next recession comes around, you’ll be happier shouldering a lighter debt burden, and you’ll definitely thank your former self for being smart with your money.
Remember, debts put us into a position of weakness (unless those debts are investments in appreciating assets). The less debt we are in, the more options and opportunities that we will have in our lives.
Almost without fail.
4: Boost your education and experience
Job opportunities in a recession or down market are heavily influenced by the laws of supply and demand. When conditions require businesses to cut back and hire more carefully, job expectations will increase.
Why? Because there will be a lot more workers than available jobs.
And as a result, companies have the freedom to pick and choose from among the sea of candidates. Naturally, most companies will select from among the best. The most qualified. The best educated.
…simply because they can.
It’s not just about education, either. Increasingly, corporations are leaning on skills acquired through job experience more than classwork.
Take some time while the economy is good to acquire new skills. This could mean formal education through community colleges, or just volunteering for new positions or getting certified in a skill that your industry values.
Also, consider freelancing on the side to help hone your skills, meet new people and build another source of income for the future.
Also, passive income stands as one of the best ways to build a continuous stream of income without a lot of our own involvement.
5: Expand your network
Along with money, one of the biggest cutbacks that happen during times of recession is opportunities. Opportunities for promotions or bonuses, new jobs, new anything.
Your chances of getting big raises or that dream position usually decrease when the market isn’t doing well.
And, that’s where your business network helps.
The more people that you know, the better your chances of finding your next opportunity. In fact, I found about 90% of my jobs in my career through direct referrals from those within my network. People I knew.
Your knowledge and experience can get you far, but I’ve found in almost all areas of business that larger networks of people open up far more opportunities for advancement, change, and new positions.
A few tips to help you expand your network:
- join trade organizations or professional get-togethers
- attend a local networking event
- stay in touch with former colleagues or classmates
Wrapping it up
The bottom line is when the market is great, we are all making money. Companies are hiring more liberally and, generally, we are all happy people. And, there’s nothing wrong with enjoying the good times.
But, also take the opportunity to prepare a bit for when times aren’t that great. Make sure that you have enough in savings to hold you over after an unexpected expense. Ensure that your lifestyle is sustainable, pay off your debts, acquire new skills and expand your professional network.
Doing these things when times are good means you won’t need to worry as much when those times change. And, I can almost guarantee you that you’ll be happy you did.