I have learned that recessions are as natural as the change of seasons. Except that they don’t come as predictably, but they do come in a cyclical pattern. When the economy expands, it will also need to contract at some point. This is why they call it the boom-bust cycle. So, when is this recession coming?
No one knows for sure, but the talking heads have been claiming a recession ever since the last one. What I do know is that our lives do not need to take a beating when a recession does arrive. Here is how we are recession-proofing our lives.
The items below are basics, more advanced information will be available in part 2
1. Set Up An Emergency Fund
Those who read finance articles are probably bored out of their minds hearing about this recommendation. Unfortunately, this needs repeating until we can change the statistic that 78% of Americans are living paycheck to paycheck (Source).
If you are living paycheck to paycheck, work on building the habit of spending less than you earn. Eventually, you will have 3 to 6 months’ worth of cash.
Otherwise, a flat tire could lead to placing things on a high-interest credit card without knowing when it’ll be paid back.
Take-Action: Open a high-yield money market fund and put it in there. You will reduce your chances of spontaneously spending down your account if you place your emergency fund in a different account than your checking account. As they say, out of sight, out of mind.
2. Demolish High-Interest Debt
While there are more secure jobs than others, if you happen to be on the chopping block, you want to be in the best possible position to weather the storm; which is to not hold any debt.
If you have any medical debt, I highly recommend listening to this ChooseFI podcast episode: RIP Medical Debt.
In 2016, I became debt-free from my student loans. It was quite a journey that required discipline and far less Top Ramen noodle packets than I expected, but it was worth it since I no longer have my 6-figure student loan balance looming over my head. If you want to read more about how I paid it off within 2 years, check out this article: How I paid off $115,000 in two years.
The only debt we hold at the time of this publication is a mortgage totaling $70,000 at a comfortable 2.25% . It is a home I purchased for my mom and it was the best investment I made to-date! The original loan was $91,000 at 4.75% and we had it refinanced at the beginning of 2021. We’re glad we did too because we’ll likely be glad to hold onto this loan as long as possible due to the likelihood I will earn more as I invest the difference.
In either case, you never know when a recession might happen, when you might lose your job, get injured, or have a family emergency, but when your life takes a turn for the worst, you’ll be better prepared (at least financially)if you don’t have high-interest debt.
Take Action: Make a list of your debts and develop a plan to pay them off strategically using the debt-snowball or debt-avalanche technique. I used a combination of both to pay off my student loans.
- Prioritize paying off the lowest balance loan first regardless of its interest rate.
- Pay the minimum balance on all other loans
- Gives you the emotional win getting rid of smaller debts first allowing you to simplify your repayment plan as time goes on.
- Prioritize paying off the highest interest loan first regardless of the amount you owe on each loan.
- Pay the minimum balance on all other loans.
- It is the more mathematically efficient way of reducing your debt faster while paying less interest
- It becomes less mathematically advantageous the smaller your debts are and the faster you plan on paying it off.
3. Know Your Cash flow and Plan To Let Things Go
We track our net worth, income, and expenses through a free app called Personal Capital.
Knowing how much money is coming in and going out is important in setting your budget and modifying it when times are tough.
Most people know roughly how much they make a month, but have little idea about where their money goes throughout the month.
Don’t believe me? Go to https://www.ssa.gov/ and sign up to view your social security benefits and life-time earnings. Are you satisfied with where you are in life with respect to how much you have made throughout your life? If not, it’s time to change things.
Take action: I recommend making a list of your expenses, organize them into necessary and discretionary categories, then have a plan of which items can you get rid of when times are tough. You may even be able to learn some things that can be cut out of your budget, like cable or other paid subscriptions people usually fail to use. Ahem… Gym memberships.
4. Keep Your Resume Updated
You found the perfect job but spent an entire night fixing up your resume when you could’ve been applying for the job or writing the cover letter. Highly desired positions can disappear quickly. One of the things that I have done is to update my resume annually. It becomes less painful when I need to move on with my career and I would rather write about my accolades when I am in a position of strength, not when I am desperate for a job.
You really should be doing this whether you are recession-proofing or not.
Take action: With every job, update your resume with your success and accomplishments as they come. Don’t forget to have it proof-read by someone you trust.
Check out Part 2