Recession Proofing Your Finances

Once again as the Pandemic monetary madness unwinds, it is time to consider how recession proof you are. No one knows if we will hit a recession, but the media has been talking about it for a year and recessions are part of the normal economic cycle. How ready are you? Here are fundamentals I am focusing on to ensure preparedness:

a. debt levels and type: It is high time to reduce and mitigate toxic high interest debt. Debt used for depreciating items such as clothes, trips, cars, etc. should be beat down to a manageable level.

If you own a home and were strategic enough to lock in one of those low low rates, then congratulations. Now is the time that essentially free money will help. You have minimized your monthly outlay and are not being eaten by high interest rates.

b. defensive investments: Are you properly diversified into defensive investment vehicles. consumer staples, healthcare, utilities, etc. tend to withstand market turbulence during a recession. Also, perhaps not a bad idea to hold some cash, especially to pounce on market opportunities when. the next bull run starts.

c. reduce spending: Are you finding ways to trim back on some expenditures? It is best to enter a recession with the ability to live lean. Many have been living high on the hog as the pandemic money piled up and we joyfully came out to live again. But now may be a good time to ramp back some of the frivolous spending and see what comes next in the economy.

d. Stay diversified: Practice strong fundamentals, see a fiduciary financial planner and ensure your asset allocation is prepared for all weather. Speaking of weather, I’m a big fan of the Dalio “all weather” portfolio that has 30% stock S&P 500 exposure, followed by long term and short term bond funds. The portfolio is built to do well in all economic conditions, not just bull markets. NOT SELLING Notice I am not selling anything. I like to invest for the long run in things that will be fine throughout economic conditions. Yes, stocks and real estate will go up and down, but I believe things of value will go up over the long term. And if the money is not needed for years or decades than the normal ups and downs of the markets are nothing to get excited about.

e. Emergency funds: It is always always always a good idea to have built an emergency fund, typically 6 months of emergency expenses. This buffers you from job losses or major challenges in life. If a recession hits and somehow your industry is effected, an emergency fund could make a major difference. I am currently focused on building back up a good emergency fund, because in the summer I had an emergency repair! Our HVAC went dead after 40 years of operating, go figure. But this wiped out the emergency fund, so time to rebuild before the next recession.

A note from the Great Recession

When difficult financial times arrive on people, those with lots of debt seem to lose the most. When the great recession hit, people that were in huge amounts of debt lost their houses, cars, toys, etc. That is partly because they never owned these things to begin with, they were simply borrowing them from actual rich people that own banks and large amounts of capital. As always, control and reduce debt when possible. The next recession may not be too bad, but the efforts we take now to prepare pay off no matter what the macro economic picture looks like.

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