With the stock market experiencing some significant drops recently, a lot of people are concerned that there is another recession right around the corner. The spread of the Coronavirus and governments’ lockdown response have made that concern all the more pertinent.
At some point, the economy will turn downward for a time. The market does not infinitely go upward. Just as in our personal lives, there are also setbacks at the macro-level that create slowdowns and setbaks. The macro-level slowdowns do affect almost everyone, though. The question is how we respond to that future possibility.
If there is a recession coming, and there may be at some point, let’s first think about what NOT to do.
- Panic. We never make good decisions when we are in a frenzied state or when we are drunk. Turn off the news for a while, take some deep breaths, and don’t allow fear-mongering to affect your judgment. Even if there is a recession, we do not have to lose our minds about it.
- Cash-out your retirement. This is quite possibly the worst choice you could make. Please don’t do it! This downturn is NOT the end of the world. The U.S. economy is not ending because of the Coronavirus. This is a temporary setback that puts a lot of funds on sale, which means this is the time to buy, not sell. Those who cashed out in the 2008 recession were the ones who locked in those losses. Don’t do it!
- Take on more debt. If you’re worried about a recession negatively impacting your household, it is a foolish decision to add more debt to your equation. This is not the time to get a big car payment, finance a couch, or take out a HELOC for home improvements.
- Get out of debt. As quickly as you can, get rid of all of your consumer debts. Cars, credit cards, personal loans, student loans; these all need to go as fast as you can get them paid off. If you don’t have any extra creditors taking large portions of your earnings, this takes a great deal of stress out of your financial equation.
- Build an emergency fund. I recommend you have at least 3-6 months of expenses in your emergency fund after you have paid off all debts but your mortgage. If you seriously believe that you may be laid off soon, it may be a good idea to go into storm mode and pause paying off debt while you build up an emergency fund until the storm has passed.
- Protect your priorities. The most important components of your household are your food, utilities, housing, and transportation; or as I call them, The Four Walls. Make sure that your pantry is well-stocked, your utilities are all paid up, your mortgage is current, and your cars are in good repair.
The politicians will try to propose some new stimulus package (financed by more debt, of course), new tax or law to try and “fix” the situation. They will make their speeches and self-aggrandize about how they alone can prevent a recession. But politicians will not solve your personal financial problems. It’s up to you to prepare for what is inevitably coming at some point in the future.
By making wise decisions from this point forward, you will prepare yourself to better handle a recession. A job layoff is not as destructive when you have no debt and a large emergency fund. I know this from experience.
The first layoff I experienced was in 2017. We still had a lot of debt and did not have a fully-funded emergency fund. It was very stressful, though thankfully I was able to string together miscellaneous jobs so we could keep moving on the debt snowball.
My second layoff was in 2019, and by then, our whole situation was different: we had no debt and a fully-funded emergency fund. This effectively turned into an opportunity to focus on my coaching practice before starting law school in the fall of 2019.
Life will throw curveballs your way. The only question is when. But if you prepare yourself and start getting rid of your debts, building an emergency fund, and protecting your priorities, you’ll be able to weather the storm of a recession while others seem to be losing their heads.