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I’ve received six or seven requests from various financial firms and publications soliciting my opinion on the near future of the economy. My response is always the same: DELETE.
The value of anyone’s opinion is sketchy at best because of the overwhelmingly large numbers of variables that might influence the outcome. That being said, I’ve been reading a lot of “top financial industry gurus” predicting recession and a lengthy one.
The fact is, they might be correct. So let’s go on the assumption that they are since preparing is better than not, right? If they’re wrong, you’ve lost nothing. If they ARE right, you have the best shot of getting through it as unscathed as possible.
Let’s set some guidelines first:
We are not talking about timing the market or guessing which sector or asset class will be the best through difficult times.
Your risk tolerance is the same in “up” markets or “down”. If you are properly aligned, you generally have the ability to withstand corrections and recessions without turning tail and running in the midst of bad times.
Preparing for a recession begins with a clear understanding of your current financial picture. You simply can’t ostrich yourself and pretend the economy doesn’t matter, unless you have massive wealth and a reasonably conservative lifestyle.
If you haven’t done so, assemble the key pieces of your net worth puzzle. List your assets (cash, savings, investments, business interests, retirement plans, etc.) and your liabilities (credit card debt, auto loans, student loans, mortgages, etc.). When you subtract the liabilities from your assets, you’ll have your net worth. The larger it is, the better!
The next step is to look at your monthly expenses. How much does it cost to run your household, including payments for your mortgage, credit cards, etc.? For purposes of planning, exclude purely discretionary expenses, such as vacations.
Now examine your cash savings. Depending on the stability of your job and industry, you typically want to have nine to twelve months of those expenses locked down in cash. If you’re in an industry that is not stable, double it or more. Right now, having the peace of mind that if your earnings are disrupted, you have other funds available is mega-important. Nothing works against success like constant worry about where your next meal is coming from.
Next it’s time to do some digging into where your money actually goes. If you predominantly use credit cards to pay your expenses, it’s an easy job to review each statement. Here’s a simple exercise that shouldn’t take more than a few minutes:
Select, at random, six credit card statements from the last twelve.
Review the charges.
Rate each expense from 1 to 5, with 5 being vitally important and 1 being, “I really could have done without that.”
Total the 1’s and 2’s from each statement. You can add half of the 3’s to the total. This is a target idea of how much you might be able to cut without misery.
A word of caution in doing this exercise. You and your significant other might disagree on the rating. For example, you might say the expense was a 1, while your significant other rated it as a 4. Take this out of the equation for now and work with what you can both agree upon.
Then use those savings to reduce debt, especially the high-interest revolving kind. Refinance your mortgage if you can reduce it sufficiently to make a difference. Depending on your age and circumstances, it might make sense in the short-term to obtain a 30-year mortgage to reduce your monthly outflow. Mortgages generally do not have prepayment penalties, so you can always pay it off sooner by accelerating the payments.
You might also look for savings in risk management costs such as premiums that can be reduced with increased deductibles. Remember, if you do increase your deductible (non-transferred risk), you need to have that amount in savings to cover you in case of loss.
Check expenses like duplicate music or other subscription services that drip money away. Look at things you outsource that can be cut, modified or replaced to achieve more savings, like lawn service, cable and phone.
Prepare an inventory of appliances, cars and household systems, looking for signs that some might need repair or replacement. These costs should also be included in your savings for use when and if the need arises.
Lastly, examine your sources of income closely. How secure are they? What are the potential threats that might impact your income? These need to be addressed as soon as possible so you can consider options and alternatives.
Getting through a recession as easily as possible, depends on knowing your numbers, making sound decisions and having as many choices as possible to continue to produce income.
Even if you haven’t felt a significant impact thus far, preparing for dire times should be an ongoing process. The longer you wait to address potential challenges, the more difficult is it to make changes.
If you’re not sure what to do, work with professionals that adhere to the highest standard of care and act in your best interest without conflicts. Allowing them the honor of walking this part of the journey with you—and for you—will surely add to your peace of mind.
Forget the projections, predictions and edicts from gurus. Focus your attention on what you can control and take meaningful action to provide you more comfort during uncomfortable times.
Related: How Families Can Bounce Back from the Financial Impact of the Pandemic