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10 years ago I was a bright-eyed, newly minted CPA. I was working for PwC and my clients were all in the banking industry. I’ll never forget arriving to my client’s office early one morning to see the head of finance looking panicked.

“Do you have any idea what’s going on out there?” he asked.

No, I didn’t. My biggest concern at that moment was they had forgotten to put whipped cream on my Pumpkin Spice Latte. I had no idea what he was ranting about and what was happening “out there”.  But to be fair, no one did.

That was the day Lehman Brothers collapsed. All the TVs on the trading floor were turned on as we watched the chaos unfold. Everyone in that room was scared for their jobs. Everyone in the country was watching the stock market plummet.

A decade later things look rosier. We’re still riding the second longest economic expansion in history. We’ve had a bull market for the last nine years. If you’ve been investing, you’ve seen your account balances soar.

 

But the question in the background is when does this all go south again? And what’s going to happen when it does?

 

A majority of economists polled by the Wall Street Journal think that a recession is in our future in 2020. Though economists don’t have a perfect track record for predicting the future, this is a reminder that what goes up will eventually come back down again.

While you can’t really recession proof your life, there are some things you can do to make sure you’re not blindsided. Jordan and I have been doing what we can to make sure we are as prepared as possible, within reason. We’ve been saving, making sure we don’t take on more risk than we feel comfortable with, and keeping our skills sharp. And if those things don’t keep us afloat in a recession, we have a plan B: you’ll find us hiding out on a beach in Thailand until the panic has subsided. I’m only kind of kidding.

If you’re trying to recession proof your money as best you can, read on. And if hiding out on a beach in Thailand seems like a great idea, we’ll see you there.

 

What’s a recession?

A recession is when the economy performs worse for a significant period of time. The technical definition is that the economy declines for two quarters in a row. (reminder: a quarter is a three month period from Jan – Mar, Apr – Jun, Jul – Sep, Oct – Dec). The economic decline is measured by the Gross Domestic Product (GDP).

What’s GDP? I’m so glad you asked. The GDP is the total value of everything produced by all the people and companies in the US. So yeah, it’s a big number.

The Bureau of Economic Analysis measures it quarterly. To calculate GDP you add how much consumers, businesses, and the governments spends as well as how much we export to other countries. From that, subtract what we import from other countries.

While you’ve probably heard about the GDP in the news, most people don’t find this to be a sexy number. Instead, you’ll likely hear people focus on the stock market when talking about how the economy is doing. But remember this: the stock market is not the economy. It can affect the economy, but when you hear that the markets are falling, that doesn’t necessarily equal a recession.

Confusing? Kind of. Multiple things in our economy are interrelated and can be an indication of how our economy is performing. As a super basic example: when the economy is doing well, people are employed and spending money. When people spend money, businesses profit. When businesses profit the stock market goes up.

This NY times graphic does a great job of explaining how it all works. But the important thing to remember here is that even though the stock market moves up and down, that doesn’t mean that we’re necessarily in a recession.

 

What causes a recession?

Our economy moves up and down through natural cycles. We have times of economic prosperity and big booms (like right now). People and business are spending money. The stock market is soaring. And there are jobs aplenty.  

We also have times where the economy contracts and things get tougher for most people. Businesses stop spending. Jobs are harder to find. People start spending less. The stock market sinks.

These cycles are natural and there’s not one single thing that causes a sluggish economy or a recession. Businesses can make bad investments. Consumers can get scared out of spending. Prices for things can increase with inflation, leading people to buy less and businesses to produce less.

Our last recession, the great recession of 2008, is attributed to subprime mortgages (big loans given to people with bad credit history). What made it worse was these loans were then packaged together to create investments. When people started defaulting on their loans, the packaged investments amplified the impact on the economy. The economy took a dive.

The recession in the early 2000’s is attributed to the dot com bubble. That’s when everyone was so excited about this thing called the internet, they dumped a lot of money into tech companies. The problem was, most of these companies weren’t profitable and really didn’t have a pathway to profitability. Companies went out of business, people lost their investments and their jobs, the economy took a dive.  

You get the idea: a recession can be caused by a number of things. And because everything in our economy is interrelated, you will be affected whether or not you take out a subprime mortgage or invest in a company that goes bankrupt. We’re all in this together.

 

Can people predict recessions?

Nope, not really. People can make educated guesses. Economists are always betting on when we’ll see the next recession. The federal reserve is constantly on the watch to see if the economy is growing too quickly. If it is, they’ll raise interest rates to try to curb inflation and stave off a recession.

But aside from all of these really smart people watching our economy, here’s the truth: the next recession is always coming. If you predict that it will be here eventually, you’ll be right.

 

Who was hurt most during the last recession?

If you have a really short memory and don’t remember 2008, 2009, 2010…pretty much everyone was hurt during the last recession. Remember, multiple things in our economy are interrelated so when one bad thing happens, it triggers a sequence of events. In this case, it was falling home prices, falling stock prices, rising unemployment, and stagnant wages. It was bad.

But there were factors that made it worse for some people than it was for others. Some of these factors were out of people’s control. Young workers had a difficult time finding jobs and those near retirement suddenly weren’t so near retirement anymore.

But there were other things that a well prepared person would have been able to have some control over:

 

Business became more efficient.

We’ve all heard about machines someday doing our jobs and we saw a preview of this during the recession. Businesses became more efficient by investing in replacing people with labor-saving machines. People who were better educated or better skilled fared better than those who could easily be replaced by a machine.

 

Credit dried up

When the housing prices dove off the deep end, it wasn’t just people with subprime mortgages who felt the effects. It became really, really difficult to access credit. Homeowners with variable interest rates had a difficult time refinancing their mortgages to keep their monthly payments affordable. People who were over-extended with too much debt didn’t have options to access more credit if they lost their job. There weren’t a lot of options available to help people get a little more money to help them through the rough time.

 

The stock market plummeted

Even if you weren’t over-extended and your job was somewhat solid, it was hard to avoid the hysteria surrounding the crashing stock market. Unfortunately, the advice of “buy low, sell high” went out the window and many people found themselves cashing in their investments (and retirement) during the decline. And just as damaging, people stopped investing for years, which meant that they missed out on the opportunity to recover their losses and help their retirement accounts bounce back.

 

How can we learn from that?

It’s been so long since we’ve had a downturn, that you kind of forget what it’s like to go through it. The stock market has been on an upward trend for over nine years and if you’ve invested, you’ve made a lot of money. If you had $10,000 invested in the S&P 500 in September 2008, it would now be worth nearly $25,000. (reminder: S&P 500 is an index of the 500 largest companies in the US. What’s an index? Read that here.)

But since we know a recession is always eventually coming, how can you protect yourself today so you don’t go into full on panic mode once it gets here? Here are 7 things you should do now to get yourself on strong financial footing.

 

1. Turn off the news

We are addicted to information, but most of it is noise. Does the average person need to know how the stock market is doing on a daily basis? No. If you’re investing regularly and putting away money with a long-term view, you don’t need to hear that the market is up or down. Remember, the people who suffered the most in the financial crisis are the ones who sold their investments when the stock market plummeted.

Consider this mind-blowing fact: the largest daily decrease in the stock market was on September 29, 2008. If you sold your investments then, you would have missed the largest daily stock market increase just two weeks later on October 13, 2008.  

Turn off the news and the noise to help you avoid the temptation to sell low.

 

2. Keep those skills and resume sharp

You’ve settled into your career, you’ve been at the same place for a few years, and you can see yourself riding out this job until retirement. Ok maybe not this exact job until retirement, but a job on this path that you’re going along.

That’s also how the pinsetter felt at the bowling alley. He thought he’d be re-setting those ten pins forever. Don’t be a pinsetter and get too comfortable in your job. Keep learning and updating your resume. You never know when you’ll need to make a career pivot.

 

3. Build that emergency fund

Typical guidance is to have 3-6 months of expenses saved and easily accessible. Don’t have 3-6 months? Don’t be discouraged. Save what you can right now. Literally right now. Go put $20 in a savings account. I’ll wait.

Have 6 months saved already? Ask yourself if that’s enough. I know the rule says six months is right, but just like all general rules, you need to apply it to your own situation. For example, Jordan and I used to feel like 6 months was more than enough for us. It was the two of us with dual income and pretty low costs. Now we have a baby (and a needy dog). I freelance and Jordan will eventually join me. We own a house. And a piece of land.

All that to say, 6 months is no longer going to cut it for us. We’re looking at building an emergency fund of 9 months or more.

 

4. Create multiple income streams

I know that there’s so much emphasis on side-hustles that it seems like overkill right now, but there’s good reason: they’re important. Not only will having another income stream help you reach your financial goals faster, but it will be a crutch you can lean on should you lose your job. And the right side hustle can even help you expand your skills, enabling you to add more to your resume.

Don’t overthink what the other income stream should be. Sure, if you have creative skills like design, writing, or photography, use those. But you can also tutor, be a virtual assistant, walk dogs, do jobs on Task Rabbit, or delivery groceries with Instacart. These jobs might bring in a few hundred dollars per month or you could be the next six figure dog walker.

 

5. Refinance and pay off high-interest debt

You might be cruising along with your debt right now and feel fine with those monthly payments. But high-interest rate debt can take you down, especially during a recession. Refinance student loans that have a high-interest rate. Consider getting a 0% APR balance transfer for your credit card debt with the goal of paying it off in the next year. Do what you can to get that debt under control now, while we still have a healthy economy.

 

6. Stay balanced

The stock market has done really well, which is great if you’ve been consistently investing. But this could leave your portfolio overexposed to stocks, which means you might be taking on more risk than you feel comfortable with. Let’s say you wanted to have your investments to have a balance of 70% in stocks and 30% in bonds. As the months or years pass, the stock market skyrockets. Suddenly you’re invested in 90% stocks and 10% bonds because the price of those stocks has increased.

That’s not a problem when the stock market is going up. But if have a lower risk tolerance, watching 90% of your portfolio take a hit when the stock market declines may cause you to do something irrational. Like sell your investments.

If you manage your investments yourself, you’ll want to keep an eye on this balance. If you invest with a robo-advisor, rebalancing your investment portfolio back to the percentages that you want will be done automatically.

Jordan and I use Personal Capital to check in quarterly and make sure that our investment portfolio has the allocation that we want. I’m a huge fan of this tool. It takes less than a minute to get a snapshot of our entire portfolio. You can watch my Personal Capital tutorial here.

 

7. Don’t buy what you can’t afford or what you don’t understand

Subprime borrowers were approved for loans they couldn’t afford with rising variable interest rates and balloon payments. Unfortunately, many of them weren’t savvy enough to turn the loan down. There’s no shame in admitting that you can’t afford something or that you don’t understand how something works.

Remember: ask all the questions and don’t buy what you can’t afford.

 

We don’t know when the next recession is coming or who will be the hardest hit. But if you want to get prepared before the economy hits the panic button, these seven things will help you feel that much more secure.

 

 

 

Photo by Elijah Hiett on Unsplash

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