3 Essentials to Survive a Recession
Hello and welcome to the Summer edition of Haider’s Hits – a seasonal blog post with timely insights to help you Invest with Clarity and Live with Purpose..
If you’ve been watching the news lately, it can seem like the word recession comes up in every other sentence, especially when the economy is discussed. You have people in every camp – some say we’re not in a recession because incomes are still up and the consumer is resilient, others are saying we are in a technical recession because of the GDP trend, and some are saying the big bad recession is looming just around the corner and you need to watch out.
No matter what camp the talking heads are in or who’s right, the fact of the matter is that recessions are part of a normal and healthy economic cycle. As true as that is, it doesn’t make it feel any easier for our personal finances when a recession does come. So regardless of whether we’re in a recession or not, here are 3 essentials you need to survive any recession.
Number 1 and probably the most important – A rainy-day fund.
Look, there are as many definitions of recession as there are economists in the world. Let’s just make it simple – on a personal finance level, recessions are filled with rainy days and if you don’t have this fund set up before the rain comes, it’ll be too late. Think about it this way… Noah built his ark on the sunny days, before there was even a cloud in the sky. The same goes for your emergency rainy-day fund, you need to build it up when things feel great so it’s there when they aren’t great or even horrible. While you build it, it will very likely feel like a waste of resources to have a cash reserve when there’s so much money to be made in the markets or in your business, but the rain comes fast and tornados even faster. When the boss calls you in to hand you the pink slip or the customers decide put the money back in their wallet overnight, it will be essential for you to have a dedicated pot of cash for that season.
Essential Number 2 – A pre-determined cut list for your expenses.
No matter how well you handle pressure when life throws a wrench into things, a true financial rainy day has the potential to rock your core and stress your capacity to do everything required to get through it. Rainy days can reduce your cash flow to the point where it’s significantly in the red. Trying to find a job or generate revenue in your business on a rainy day is stressful enough – there’s no reason to add to that stress with figuring out how to manage expenses at the same time. You need to prepare a pre-determined cut list of your expenses ahead of time. Before a recession starts taking its toll on your family, take time to go through your monthly expenses and decide now which ones you’ll eliminate immediately if the rainy day turns out to be more like a financial tornado. Identify discretionary expenses like dining out and subscriptions to streaming services or cable you will cut right away if times get tough. When the rainy day hits hard, you could immediately act on your plan to potentially reduce your expenses by 30% or more. It is essential to have a pre-determined cut plan for your expenses.
Essential Number 3 – Minimize your debt use.
When times are good, it’s easy to afford a large monthly payment for that nicer car or home renovation today… or maybe even both! Unfortunately, when rainy days hit hard, the monthly cost of things you’ve financed could haunt you and severely limit your ability to survive a recession. When times are good and income is great, don’t tie up your monthly cash flow into fixed debt payments that won’t go away when that income stops. Instead, try to save up for what you want and buy it in cash to avoid being caught on a rainy day with larger bills than you can afford. It’s essential to minimize the use of debt on things that aren’t adding positive income cash flow.
I always say that a well-developed financial plan can help you cover these essentials and position you to not only survive downturns but thrive through the subsequent expansion. Thanks for joining me today. Please remember to pass this along to your friends and family and I look forward to sharing more in the next edition of Haider’s Hits.
