Let me assure you: a recession IS coming. Honestly, it’s built right into capitalism by way of the business cycle. What we can’t know, now or ever, is when it’s coming.
In fact, strictly from an academic perspective, we only know that a recession has hit 6 months after it starts…
But that doesn’t mean we can’t prepare for one.
In fact, “Preparing for a recession” could otherwise be called “prudent personal financial planning.”
It’s what we should be doing all the time, not just when a recession is looming, or we fear it is.
You Can’t Control When the Recession Hits. Nor A Lot of Other Things.
A recession is a great example of “Things We Can’t Control.” Also in its illustrious company are:
- How the stock market performs
- How your company stock performs
- How the real estate market performs
- What your own home could sell for (to a large extent, at least)
- Whether your startup goes IPO and when (ignoring those of you who actually make that decision at your company)
- Tax rates
- Whether or not you’ll get laid off
You Can Still Prepare to Better Survive a Recession
You’ve probably heard that you shouldn’t focus on the thing you can’t control (because it’s useless). You should instead focus on things you can control. When it comes to preparing for a recession, what can you control?
THE SIZE OF YOUR EMERGENCY FUND
The bigger, the better. I mean, within limits, but I’d say that if you work in tech, own a home in a tech-heavy area, are married to someone in tech, and own company stock…an emergency fund equal to 12 months of living expenses isn’t at all unreasonable.
HOW EXPENSIVE A HOUSE YOU BUY
Are you considering buying a home? Can you afford the mortgage only if you keep on receiving those sweet sweet $50k or $100k of RSUs each year? Or you can juuuuust afford it based on your current (let’s face it, possibly inflated) income? Don’t. Do. It. In a recession, you might lose your job (and therefore all your income), or the stock price might plummet, or your company might scale way back on stock compensation, or you have to take a lower paying job. Don’t leave yourself with no wiggle room.
HOW MUCH YOU SPEND (AND THEREFORE HOW MUCH YOU SAVE)
Watching how much you spend has two benefits:
- You develop the habit of spending less (or, at least, a reasonable amount for your income), and that habit will come in super handy if your income disappears.
- You are able to save more, and having savings helps you get through a recession
The most important expenses to focus on are your fixed expenses, the ones you can’t quickly get out from under if you needed to, like a mortgage or a car loan.
THE EFFORT YOU’RE PUTTING INTO CREATING A ROBUST PROFESSIONAL NETWORK
Maybe you’ll lose your job (in fact, you’re practically certain to at some point). The important thing at that point is your resilience. What people can you rely on to help you get another job?
THE EFFORT (AND MONEY) YOU’RE PUTTING INTO DEVELOPING THE SKILLS THAT WILL MAKE YOU A DESIRABLE EMPLOYEE.
I know there are some useless shmucks out there who can get a job on schmoozing alone. (Schmucks and schmoozing…there’s gotta be some sort of “sch” hat trick somewhere.) But for many of us, having in-demand skills is also going to be necessary.
HOW AGGRESSIVE YOUR INVESTMENT PORTFOLIO IS
In general, the longer the time frame until you need the money (retirement is 30 years off!), the more aggressively you should invest your money. But if watching your investments lose half their value in just a few months (as they did—and more!—in the Great Recession) is going to drive you batty, then you need to invest more conservatively. The best “asset allocation” (basically, balance of stocks and bonds) is the one you can actually stick to in the long run.
And especially if you think you might need the money in the next, say, 3-10-ish years, you should definitely be thinking about how much money your portfolio could lose, and how that loss could directly impact your ability to do the things in your life you want to do.
HOW MUCH COMPANY STOCK YOU KEEP
Kind of like an extreme version of the previous bit on aggressive investing. Keeping company stock is about the most risky investment you can make: not only is it a bet on a single company, it’s also the company that pays your salary. In a recession, you could easily lose your job (income) and most of your investments, too, if it’s heavily in company stock. Yeowch.
YOUR INSURANCE COVERAGE
I’m talking about three things here:
- What kind of insurance you have: disability, life, homeowner’s or renter’s, auto, liability
- If you have enough dollar-amount coverage for those things
- Whether or not the protection is tied to your job. Life insurance is often tied to our job (we get it through employee benefits), and long-term disability insurance is almost always tied to our jobs. Ideally, we have private policies that survive the loss of our jobs.
This is a pretty big list of things to take care of. But thankfully they’re pretty much all part of a comprehensive financial planning process, whether you do it with a planner or DIY. Even if a generalized recession doesn’t happen, your own personal recession could.
So, don’t fret about a recession, please. Instead, start checking off the list of the things above to make yourself as “recession-proof” as possible.