Your Financial Plan for the Next Recession

| August 21, 2017
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It did not matter who got elected in 2016: many felt that the next president would preside over a recession before they went for reelection in 2020. In January of 2016, one of JPMorgan's models had the chance of a recession happening in the next three years at 92%. In June, they reacted to dismal job numbers to state a 36% chance of a recession happening within 12 months. Here we stand in 2017 with no signs of a recession, but with an 8 year run of GDP growth and strong performance in the labor markets, many believe that we are due to see a pullback. Regardless of when it happens, you need to have a financial plan for the next one.

Back in 2008, many millennials were either entering college, enrolled, or recently graduated when the "Great Recession" happened. The real estate and stock markets crashed, lending came to a standstill, and 8.7 million Americans lost their jobs.

However, most millennials didn't feel the most severe repercussions of this recession. They likely had few assets that could lose value as they focused on repaying their student loans. Their jobs were likely more secure than the average worker. The combination of their education and youth led to bargain salaries compared to those with decades of experience and raises.

They may have had a hard time finding their first job with a salary that could sustain life with loan repayments. While challenging, they likely didn't experience the tribulations that many encountered: having both spouses see a reduction in their income, being unable to sustain a mortgage payment or being unable to sell the house due to a cold market, and watching their financial plans for college and retirement savings completely blow up.

While most recessions are not as "Great" as the 2008-2010 recession, this did show how a lack of planning can cost families during dire times. We tend to forget about these risks during the good times. When we see unemployment at 5%, our salaries rising and stock markets hitting all-time highs, we let our lifestyle expenses creep up to our incomes. Thus, this is your guide to planning for the next recession; Not if, but WHEN it happens.

Protect Your Income

The main driver to financial chaos is losing the ability to earn an income. If someone is signing your paychecks, you are vulnerable to being fired in a time requiring budget cuts. Even if you are a business owner, your customers may have to cease buying from you while they tighten their belts.

The first step to protecting your income is to become indispensable. If your firm had to lay off half of their staff today, would you make the half that stayed? If your customers had to slash their budget in half, would your product or service fall into the "needs" or "wants" category? What can you do today to ensure you could withstand these events?

For employees, this may mean taking on more important projects, learning new skill sets, or simply asking your boss for a review of your performance. Most are not willing to take a look at where their faults are. If you can proactively find ways to become indispensable, you may survive large scale layoffs.

For business owners, remember the 80/20 rule. Most likely, 80% of your revenue is coming from 20% of your customers. Reach out periodically to ensure their satisfaction, but also ask if there is anything you can do to improve your service.

Diversify Your Income

If you have done everything you can to secure your primary source of income, are there other ways you could earn money? Could you freelance as a web developer, designer, or writer on a site such as Upwork? Could you tutor, become a landscaper, babysit or become a dog walker? Do you have an idea for a small business that you simply have not launched yet? While the economy is stable, this is a good time to see whether or not your talents could earn income on the side. Launching during a recession is could be exceedingly difficult. Testing these waters will tell you whether you will have a viable alternative. If it does not work out, move on to the next idea. It could take 10 businesses to find the one that is sustainable.

Finally, learn to network effectively and keep your resume updated. In times of recession and hiring freezes, each job opening will attract hundreds of very qualified applicants. The people who get these jobs are likely going to be those who come from strong internal referrals. While you may not be looking to change firms today, keep in touch with those in your industry. Find ways to send them referrals or improve their business. Connect with colleagues on LinkedIn and keep them updated on your big successes. If you ever need to come asking for a favor, the goodwill you build now will give you a better chance at scoring an appealing opening.

Emergency Savings and Spending

Run the "stress test" on your financial situation today as if you just lost your job. Do you have enough in your checking account to cover 3-6 months' worth of expenses? Do you know how much you are spending each month? Of that amount, how much could be cut in a time of need? Look at areas such as your cable bill, gym membership, dining out costs, or other splurge purchases. The last thing you want to do is start racking up credit card debt at an 18% interest rate to cover these types of expenses. You may also want to look at areas such as your housing costs. If these are in excess of 28% of your income, you may need to consider downsizing in order to have enough free capital to live off of.

One thing I tend to see is a millennial becoming very motivated to eliminate their high interest student loan debt. They may even start doubling their monthly payments on their home mortgage because they simply want to be debt free. While these principles are admirable, keep in mind that Navient or your mortgage lender will not give back this money. Thus, if you have not set up an emergency fund yet, hold off on going overboard on your loan payments.

Finally, in worst case scenarios, think about where you might be able to access money if necessary. A home equity line of credit (HELOC) gives you a debit card or check book to write against the equity you have built up in your home at a very low interest rate. Set this up today while you can- hopefully you will never use it, but it will be there if needed. You probably won't be able to rely on the Bank of Mom and Dad anymore, especially if they are already retired and relying on a fixed income.

Invest Appropriately and Do Not Panic

Most of the millennials I work with have a variety of financial goals. These may include home down payments, vacations, weddings, honeymoons, having children (which involve child care costs or a spouse losing their income), starting college savings plans, and saving for retirement. I encourage my clients to invest toward these goals as opposed to building up a savings account at 0.25% interest. However, I also stress the need to be conservative for short term goals and aggressive for long term goals.

Your retirement accounts should be very aggressive, with almost 100% of these assets in stocks. That means that if a recession hits, $100,000 could evaporate to $50,000 in a matter of months. DO NOT PANIC! You do not need this money for 25 or 30 years! Between now and then, you will see upwards of 6 expansions and 5 recessions. After riding the roller coaster, your assets will climb in value. Do not try to time the market. Here in 2016, there are many people who have missed one of the greatest stock market recoveries in history. This was due to their stubbornness to hold cash and "wait for a better opportunity." Timing the stock market is a sucker's game. Instead, keep contributing to your 401(k) and buy companies that are now suddenly on sale!

Your short term goals should be invested very conservatively- likely with only 40-50% of the portfolio in stocks, with the remainder in bonds or other stable value investments. If the goal is considered a necessity, you cannot afford to go all the way down with stocks if you do not have at least 5 years to see that recover.

Have A Financial Plan and Wait for Opportunities

Just as with any other emergency, it is prudent to be proactive in a time when you can remain calm. Knowing your alternatives will allow you to stay rational when you are let go from your job or you see your accounts plummeting in value. Downturns are an inevitable part of the economy, as are expansions such as today's. Don't get caught being over leveraged and your financial plan will be able to survive any external events.

Even better, if you can live as if you are in a recession today by cutting your expenses and ramping up your savings, you will be ready to scoop up the many opportunities that will certainly await. In 2009, real estate investors were rewarded with sinking home prices AND tax credits. Stock investors have seen 300%+ returns from the bottom. If you can build up a level of assets that you won't need, you will be rewarded when over leveraged investors have to bail. Don't miss out!

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