It’s been a long time since we had our last recession. We turned the corner on the “Great Recession” in the spring of 2009 and since then we have had in North America a decade of relatively steady recovery and even some growth. But good times never last forever. And the signs of the next recession are looming: a tilting yield curve, softening housing markets, reduced global trade, a slowdown in the shipping business, and more. All these things may point to trouble on the horizon. And there is no shortage of people speculating that we may be in trouble in the near future.
I am not in the business of prognosticating, so I won’t chime in on when a recession will happen. But I will say it is going to happen, sooner or later. Economies are cyclical and the current recovery/growth cycle is getting pretty old from the perspective of historical averages.
But a recession is not something to fear. It is a natural part of the way free-market economies work. For sure, they can cause real problems for individuals and families, but with a little planning a lot of the risk can be mitigated.
Ideally, we’d all head into the next recession with a ton of cash and not a care in the world. Unfortunately, that’s not realistic for most of us. If you are in debt, a primary concern will likely be around your employment and whether you will be able to continue to service those debts. So let’s look at some strategies that make sense when facing a potential recession under those circumstances.
Preparing In Advance Is A Plus
Often in a recession, banks get nervous and tighten their lending standards. It’s important to regularly review your debts to ensure you are paying as little interest as possible on them. Low rate credit cards, lines of credit and consolidation loans can all be used to knock a few, or several, percentage points off your higher-interest debt. But when banks get nervous and tighten up, accessing those better products can be difficult. By regularly reviewing your debts and minimizing the interest being paid, when a recession does come you will be better prepared to weather the storm.
Trying to get better rates on your credit after the crap has hit the fan is too little, too late. Be proactive.
Cash Is King
If you are concerned about a recession and the impact it may have on your employment and income, it may make sense to suspend any aggressive debt-repayment strategies you are working on. Now it’s true that going into a recession with less debt is a good thing, but think about this scenario:
Imagine you are heading into a difficult period with $10,000 in savings and a $10,000 loan. Worried, you take all your savings and pay off the loan. You celebrate because you no longer have a $300 or so payment to make every month. It feels….”safer”.
But what if the following month you are laid off? Now what? If you still had the $10,000 you could make your $300 payment and cover your living expenses for a while as you looked for new work. Now that the money is gone, you are kind of stuck.
So, if you are worried about the state of the economy generally, or your employment prospects more specifically, you may want to fall back to making minimum payments on your debt, reducing your spending, and piling away whatever savings you can, while you can. If things change and your confidence returns, you can always put some of that savings back on your debt in the future.
Paying down revolving credit (like credit cards and lines of credit) with a plan to readvance if you run into trouble is not a great alternative to this plan. Having worked at banks for years, I have frequently seen them re-evaluate credit facilities, especially when they are concerned about rising delinquency rates, and unilaterally cut credit limits. It would be awkward to count on an available line of credit only to have it withdrawn by your bank when you need it most.
Protect Your Income
The greatest asset you have, bar none, is your ability to make an income. Ask yourself: if I lost my job today, what are the chances I would be able to find new work in short order? Do I have skills that are in demand?
During the 2008 economic crisis, the automotive industry was particularly hard hit. There were huge layoffs and it caused real trouble for a lot of people. The challenge was made more acute by the fact that there was no demand for workers in that industry at the time. If you had been installing seats in cars all of your life, suddenly the one thing you really knew how to do wasn’t in demand anymore.
Trying to retrain after a layoff is hard, especially given the stress that most people experience in those circumstances. I would recommend that, while you are still working, you browse the job postings for your area and see what kind of jobs are in demand. Are your existing skills transferable to a new business? Can you get training through an online provider or community college that will better position you if you have to make a change? Being prepared ahead of time can greatly reduce stress if the carpet is pulled out from under you.
Lastly, think about maintaining geographic flexibility. Making a move to a new community where your current skills are more in demand can be the fastest and easiest way to get back to work!
Bankruptcy May Be Your Friend
Bankruptcy is looked at by many as the end of the world. People fear it. They dread it. It’s a misperception that I would really like to see come to an end. Bankruptcy is a legal provision that was put in place because society recognizes it is not healthy to have people stuck with debts they can’t repay for their whole life. That kind of debt destroys families, enslaves people to lenders, and prevents them from contributing more to the overall economy.
If you have significant debt and few assets, bankruptcy may be the best thing you ever do for yourself if you get to the point where paying your debts is unreasonably onerous or impossible. If your net worth (all your assets less all your debts) is low or negative, even if you aren’t having challenges now, you should be familiar with bankruptcy provisions in your area. Let’s face it, if that’s where you are at today, a job loss or illness could quickly pull you over the edge.
As an example, in my area a spouse can’t be forced to disclose any personal information if they are not filing for bankruptcy themselves. Further, certain retirement accounts are protected from bankruptcy proceedings. Since I have always had the higher income, for a long time I held all the family debt and my wife’s income went to savings in her name. The only liquid asset I had was my protected retirement account and we either were renting our home, or owned but had little equity. We never came close to needing to consider bankruptcy, but we always knew that, if the worst-case scenario happened, we could get out from under our debt loads without losing the assets we did have. Not every jurisdiction works this way, but it illustrates why knowing your bankruptcy laws and positioning yourself with them in mind can be a protection. It’s a lot like taxes: operate strictly within the rules, but structure your affairs to minimize the impact to the fullest extent possible.
Bankruptcy is not without its downsides, of course, but properly executed it can be a life saver.
Don’t Be Sidetracked By Aggressive Marketing
In a recession, just about all businesses suffer. And before you know it, retailers are facing growing piles of unsold inventory they can’t move. This is when steep discounting takes hold as they struggle to move product. Suddenly, everything is cheap: homes, cars, appliances, furniture, electronics….it goes on and on. Always remember though, you can never save money by spending. No matter how cheap an item has gotten, if you buy it, that is still money paid out that you no longer have.
Now, if you’re financially secure and purchasing distressed assets is part of an overall strategy, fill your boots. It’s great thinking. I have friends that travelled to Florida in 2009 and bought boats for, in some cases, a fraction of what their value had been a couple of years before. It was a great deal for them.
But, if your primary focus is to get through a tough economic time with your assets and family intact, don’t get distracted by deals that can put you back in financial jeopardy.
Don’t Sweat The Small Stuff
Recessions come and go. They are just a part of life that has to be dealt with. No point worrying about things you can’t prevent. However, by giving some thought to your circumstances you can greatly mitigate the risks, reduce your stress, and get through it with greater confidence.
You’ve got this.
Important Disclaimer: the information above is for general informational purposes only and does not in any way constitute an offer for the purchase or sale of any security and is not intended to be considered comprehensive or personalized financial or investment advice. themoneygeek.info assumes no responsibility for the use or application of this information. Always consult a tax, investment, or other appropriate professional before adopting any new financial strategies.
I am an accredited Financial Planner with 23 years of experience in the financial services industry. During the course of my career I completed hundreds of financial plans and recommended and sold hundreds of millions of dollars of investment products. I believe that financial independence is a goal anyone can aspire to and I am passionate about helping others to live life on their own terms.