I’ve always thought that one of the formative periods of my life was the Great Recession of 2008 and 2009. It’s an event that I think defined my cohort. We graduated into one of the worst economic periods in history, and if the studies are right, it might have set us back financially for the rest of our lives.
Strangely enough, even though the Great Recession had such a large impact on my life, it barely registered as an event to me at the time. I was insulated from it by the fact that I was in college and had no money. The reality of the recession didn’t hit me until I graduated in 2009 and found that I couldn’t get a job. Like much of the class of 2009, I ended up moving back home with my parents and found myself heavily underemployed, working in service industry type jobs or doing unpaid internships.
Now, after a ten-year bull run, it’s starting to feel like we might be heading towards our first real downturn in a long time. I don’t claim to be an expert at dealing with financial fallout – I was just a 22-year old kid when the last one happened. At the same time though, the recession was one of the defining periods of my life. It’s the reason I ended up where I am today and probably why I think about money the way I do.
So, whether we are going into a recession or not, here are a few thoughts and strategies I’m thinking about.
1. Losing Your Job Is What’s Going To Matter, Not Your Investments
Whenever the market takes a downturn, you always hear from people about how much money they’ve lost. Indeed, my own investments have dipped by over $50,000 since they reached their high a few weeks ago.
But as we all know, you haven’t really lost anything until you actually sell your investments. And unless you’re actually drawing down your investments (which most of us are not), then from a practical standpoint, the value of our investments means nothing. They’re just numbers on a page.
What will actually matter is whether this downturn leads to you losing your job because our jobs are what leads to income and our income is what actually matters when we’re not financially independent. Back in 2008, a lot of people ended up getting fired (or like me, never got a job in the first place). That’s what caused the hurt for most of us – not the numbers on a piece of paper. Which leads me to point #2…
2. Have An Emergency Fund – And Make It A Big One
Because it’s our income that matters, the obvious thing to do is to take steps to reduce the impact that a loss of income has on us. This is why I’ve always advocated having a pretty big emergency fund to hold you over in the event of job loss.
How big of an emergency fund you keep is up to you. You have to always remember that keeping cash on hand does carry with it an opportunity cost – every dollar you keep in cash is a dollar that isn’t growing. Over time, that cash actually loses money thanks to inflation.
But there are ways around this cash/inflation problem. My strategy has always been to max out my 5% interest accounts – it’s why I have a $42,000 emergency fund that I personally think is the best emergency fund in existence. What makes my emergency fund strategy so good is the fact that it gets the best of all worlds – that is, the safety of FDIC insured bank accounts combined with a guaranteed rate of return that handily beats inflation. Beyond this, you can also use idle cash to earn bank account bonuses, which allows you to earn higher rates of return (5% or more easily) without risk and without losing the flexibility to pull cash when you need it.
A cash emergency fund isn’t the only emergency fund you can have. I’ve advocated for having a “side hustle emergency fund” as well. This includes all of the income-generating things you do outside of your day job that you can fall back on if times get tough. Having a side hustle emergency fund means that your cash emergency fund can last even longer if you’re able to generate a little income to cover some of your expenses. In terms of when to set up your side hustle emergency fund, I’ve always said it’s better to do it when times are good because when times are bad, you don’t have the luxury of giving yourself a ramp-up period.
A final, sort of out-of-the-box emergency fund that you can fall back on is the points and miles that you’ve accumulated via credit card rewards. Most people don’t think of these as assets, but they do have a real cash value. I get some comfort in knowing that, if needed, I can grab a short-notice flight using my points. If I get really desperate, I can even cash out some of these points and miles for actual cash.
3. Pay Minimum Payments On Debt And Save The Extra
I paid off my student loans back in 2016 and my strategy back then was to throw everything I could at it whenever I had excess cash. This hyperintensity was one of the main reasons I was able to pay off my student loans so quickly.
Over the years though, I’ve started to second guess this strategy and have favored a more loose approach to student loan repayments. Rather than throwing everything into your student loans, I’ve thought it might make sense to save your extra payments in a separate, high-yield savings account. At some point, you’ll have enough saved that you can pay off your student loans with a click of a button. But if something happens, you still have cash that you can use.
This is what I did during the last six months of my debt payoff journey when I knew I was about to change jobs. I was nervous about the uncertainty and the pay cut I was going to take, so I thought it would make sense to keep cash on hand. The idea here was that if I made payments with my excess funds, that money was gone forever and couldn’t be used for anything else. But if I saved it away, I still had access to that cash and could use it if necessary. And if I didn’t need the money, I could take all of it and wipe out my debt with a single click.
This is a strategy that my wife and I are implementing at this moment. She still has student loans and instead of taking our cash and making extra payments, we’ve spent the past year or so paying minimum payments on her loans and stockpiling the excess into a savings account. Yes, we lose a bit on interest, but if something happens, we’ve got this money sitting in a savings account ready to go. To us, flexibility and the ability to ride out potential storms is more important than the small extra amount we have to pay in interest. When we’re ready, we’ll pay off her student loans with one click.
4. Don’t Buy More Or Buy Less – Stay The Course!
One of the things I often hear people say is how a downturn is an opportunity to buy more stocks. I’ve always found this a little bit puzzling, especially since the people who say this are often indexers and folks who don’t believe in market timing.
The truth is, buying more when the market is down is exactly market timing but in the opposite direction. Just as the general advice is not to sell when the market drops and rather, stay the course because we can’t know what the future holds, the same is true about not buying more when the market takes a dip. We don’t know where the market is going, so all we can do is buy as much of the market as we can and do so on a regular schedule.
A few weeks ago, I saw a lot of people talking about how they were buying more stocks in the wake of the initial market drop. Since then, the market has dropped even more. This means these folks timed the market wrong (as most of us will). And it begs the question – what were they doing with their money before and why wasn’t it invested?
Instead of buying more, continue to do what you’re doing. If you invest with each paycheck, continue to do that. If you invest once per year (like I often do because of the way some of my retirement accounts are set up), then keep doing that too. In the end, the only real way to avoid market timing is to pick an investing schedule and stick with it, no matter what. Long story short, ignore the noise in either direction.
5. Recent Recessions Aren’t The Way Recessions Will Always Be
There’s this thing a lot of people seem to think. We have this idea that the most recent thing that happened is how we think things have always been.
During this last decade, countless perma-bears have talked about how the next big crash is going to happen. The more aggressive perma-bears like to say how it’s going to be even worse than the 2008 financial crisis. Even those of us that aren’t perma-bears seem to have this idea that the next downturn is going to feel like 2008, with everything tumbling into another Great Recession.
The thing to remember is that 2008 was out of the ordinary – a potentially once-in-a-lifetime type event. It’s why they called it the Great Recession – because it was worse than anything we’d ever seen before. Crashes and recession haven’t always looked like that. Heck, the lost decade of the 2000s is not the way market cycles have always looked like.
I imagine that after the Great Depression, most people thought the upward trend of the market couldn’t stay that way and that we’d eventually tumble back into another Great Depression. Today, with so much time passed between us and the 1930s, none of us think of recessions in terms of Great Depressions. But I bet our grandparents and great-grandparents thought of the economy in that way. I bet they thought that when the next crash happened, it’d look like the Great Depression again.
The point of this is that crashes and downturns aren’t necessarily going to look the same. Don’t assume that the next one will look like the last one we had.
6. Living Lean Is Going To Help You A Lot
Trouble happens when you have a lot of fixed costs and no way to pay for them. For all of us, lifestyle inflation is a natural progression. As we earn more income, we start spending more in our day-to-day life.
The problem with lifestyle inflation is it ties us to a specific income. This has the effect of forcing us to make a certain level of income in order to live. And it also removes a lot of potential jobs from our arsenal. If I need $100,000 to live, I really have no choice but to get a job that makes $100,000 or more. If I only need $30,000 to live, I can do almost anything.
What this means is that if you’re the type that’s living large now, you’re going to need to tone things down if you want to avoid crashing and burning if/when sh*t hits the fan.
I’m not immune to fear and there are definitely a lot of things about the current state of the world that scares me. While I’m not working a traditional job that I can get fired from, my work (writing on this blog) isn’t steady. My income from this blog comes from ads and affiliates and if the economy keeps tumbling, who knows what will happen to that income. I assume that when companies start making less money, they probably cut their marketing budgets, which will directly impact my ability to earn income.
My side hustle income isn’t that reliable either. When things get bad, people are going to cut back on luxuries like having their food and groceries delivered. I also have a feeling that more people will turn to gig economy apps when the going gets tough, which will mean more people on these apps and fewer opportunities for all of us.
But I know that more likely than not, things will pass. The market is cyclical. Things go up and things go down, but if I believe that people will continue to build and innovate and create value, then I know that the market must, in the long-term, go up. We barely had the internet 20 years ago. I didn’t even get my first smartphone until 2013. There’s going to be stuff created in the future that we can’t even imagine yet.
You can be prepared though. And the thoughts and strategies in this post are the things I’m thinking about if the market continues to tumble.
What steps have you taken in the event of a downturn or recession?