Recession Proofing (3/13/25)
Happy Friday everyone!
I had a completely different topic in mind for this week’s newsletter, but with the media buzzing this week about concerns of a looming recession, I figured there was no better time to start this conversation.
Before anything else, I want to point out that I have been fielding questions from news outlets about the likelihood of a recession since 2018, and with the exception of about a 6-week downturn at the beginning of COVID, we haven’t really seen one since the financial crisis in 2008. I say this to highlight that while recessions are inevitable, and a totally natural part of the market cycle, they are also extraordinarily difficult to predict. In fact, if you were to look at financial news from the last few years, you would see investment banks making predictions in 2021, 2022, 2023 and 2024 that a recession was imminent, and each of those years they were completely wrong. Moral of the story? I don’t know when the next recession is happening, I don’t know how long it will last, and I don’t know how long it will take the economy to recover from it. Nobody does. But I do know ways that you can prepare yourself financially to ride out any tough times ahead!
Compare Your Income to Your Expenses
Recessions come with great job market uncertainty. Unemployment rises, companies reduce staff, even those in secure positions can see wage growth slow or decline.(think no cost of living raises, elimination of overtime, reduced or eliminated bonus compensation, etc.) With that in mind, when was the last time you assessed what percentage of your income you need to cover your basic living expenses? Do you know your savings rate? Do you know how much of your income goes to discretionary spending vs. necessities? If it’s been awhile (or never), now is the time to figure out if you’re living within your means. If you need more than 80% of your net pay to cover your basic living expenses (bills, necessities) look for ways to reduce your expenses or increase your income. And you may want to hold off on any new, large, on-going financial commitments like buying a new car or signing a lease for a more expensive apartment if it can be avoided.
2. True Up Your Emergency Fund
Your emergency fund, or cash reserves, are the foundation of your financial security. Cash will allow you to cover bills in the event you lose income or have unexpected expenses, and allows you to avoid accumulating debt. A good rule of thumb is to keep between 3-to-6 month’s worth of essential expenses in cash (ideally a savings account, money market or equivalent) that is not subject to investment risk and easily accessible. Self-employed or retired? Closer to 12-months worth of essential expenses in your emergency fund is ideal.
3. Attack Bad Debt
Not all debt is created equal. There will be a future edition of this newsletter dedicated to good debt vs. bad debt, but for the purpose of this checklist consider any unsecured, high-interest debts as bad debts. This would include credit card balances, personal loans, or really anything charging 7% interest or higher. Eliminating bad debt will help you free up cash flow (see #1 above), save money, and improve your credit score. You’ll be less likely to rely on debt in the future or face bankruptcy if things go south temporarily. Eliminating this debt can also improve your physical health! Carrying debt is linked to anxiety and heart problems, and really, you don’t need one more thing to worry about when the economy has gone to hell.
4. Avoid Emotional Investment Decisions
The economy and the stock market are not one in the same. A bad economy does not necessarily mean a bad stock market (and vice versa) but, we do often see plenty of volatility and a market decline during some phase of a recession. When the market tumbles investors tend to panic and think they should get out of the market because it will only continue to go down. That’s almost always the wrong move. Trust that the market will rebound as it always has, and let your investments ride out the wave. A struggling economy is not a good reason to sell your investments and move to cash, and you’ll want to avoid pausing any recurring contributions to investment accounts, like 401(k)s, as long as you can comfortably afford to keep making them. Putting money in when the market is down is like buying investments when they’re on sale. Don’t wait for the price to go back up before putting your cash to work. Trust the process, stay the course, don’t touch it.
5. Don’t Panic
Recessions happen. They are a natural part of the market cycle, and chances are you’ve lived through quite a few of them in the past and didn't even realize it. You also can’t stop it from happening, but you can spend some time this weekend reflecting on your personal finances and consider ways you can put yourself in a stronger financial position so you can sleep better at night when the time comes.
Wishing you good financial health.
