The United States has had 11 recessions since 1948 averaging to about 1 every 5-6 years, with each one averaging about 1 year long.1 As of the writing of this blog, Fed Chair Powell has indicated his desire to push interest rates higher in spite of a likely slowdown in our economy. If he is as aggressive as Volcker was in the 1980s, the stock market should come down 50% and the unemployment rate should reach around 10%.2 There is no way to predict if or when precisely a recession will happen, but if you consider yourself a ConCapper, then you must be ready for whatever comes. Here are 4 steps to be prepared for a recession.
1. Pay off all your credit cards and other high-interest debt
If you were to guess how much interest credit card companies make as revenue per year, what would it be? $1 billion, $5 billion, maybe $10 billion? How about $176 billion per year!3
Credit cards are a source of such tremendous amounts of financial pain, that it is a wonder how much actual credit card debt there is. The last thing you want if and when you potentially lose your job during a recession is to still have to pay eye-gouging levels of interest on your debt. Our recommendation is to start by trying to tackle the highest interest debt first and then working your way to the next balance.
2. Save at least 6 months of reserves
A reserve is one month’s of your expenses. If you spend $5,000 per month, then 6 months’ reserves would be $30,000. Credit cards are NOT reserves. A home equity line of credit is NOT a reserve. Cash in the bank, preferably in a savings account, is what we are referring to here. If you are more ambitious, then shoot for 12 months of reserves. Several of our clients have many years worth of reserves. Do what you feel comfortable with, but do something, don’t just wait and then panic once the recession comes.
3. Live well within your means
What is truly remarkable is the percent of Americans living paycheck-to-paycheck – it’s 85%.4 Okay we can say, but most of the income is taken in by the top 1% right? Wrong. If we take per capita GDP excluding the top 1% of Americans, then we still have $45,500 per person.5 That ranks at 20th in the world.
There is no denying that the middle class and lower-middle class has been squeezed over the years. But that is not the entire reason for this staggering level of financial insecurity. The true cause of financial insecurity is, by and large, very poor decision-making. There are no classes in school, although there should be, on how to make simple budgets and help children understand the value of living within your means. But as a ConCapper, your goal is to make this your practice.
What does living within your means mean? It means you live on a maximum of 80% of your income and leave the remaining 20% for unexpected expenses. If you take your total household expenses and divide it by your total net (not gross) household income, it should be 80% or less.
4. Scale back the risk in your portfolio
The other three items you can do on your own, but on this you’ll likely need help from a qualified financial advisor. There is a time to take on risk and other times to take profits and take some risk off the table. Although it is not guaranteed, during a recession, asset prices typically go on sale. It has happened with every single recession in the past. When asset prices go on sale, it is a good idea to have some dry powder ready to buy into quality equities according to your risk tolerance and suitability.
In short, as we always say:
You fix your roof before it rains.
If you are a ConCapper, then you know that recessions are a part of life. Recessions do come over time, and they will continue to come. It can be a small thunderstorm, or it can be a hurricane; no one knows for sure. In any case, you need to be ready. You need to be ready to man the stations when the time arrives. It can feel like a speed bump if you are prepared. Otherwise, it will feel like slamming into a brick wall.
If you are not a ConCapper, don’t hesitate to reach out to us to see how we could help in your financial independence journey. Visit our Requirements page to get connected. We invite you to like and follow our company Facebook and Twitter pages to get real-time access to our new articles and company updates.
Sources:
1 – Amadeo, K. (2022, October 19). History of recessions in the United States. History of Recessions in the United States. Retrieved December 4, 2022, from https://www.thebalancemoney.com/the-history-of-recessions-in-the-united-states-3306011#:~:text=How%20often%20do%20recessions%20occur,as%20long%20as%20a%20decade.
2 – News Release: Bureau of Labor Statistics U.S. Department of Labor. (1981, February). Employment and unemployment: a report on 1980. Retrieved September 30, 2022, from https://www.bls.gov/opub/mlr/1981/02/art1full.pdf
3 – Caporal, Jack. (2021, October 6). This Is How Credit Card Companies Hauled in $176 billion in 2020. The Ascent: A Motley Fool Service. https://www.fool.com/the-ascent/research/credit-card-company-earnings/
4 – Dickler, Jessica. (2022, June 27). 58% of Americans are living paycheck to paycheck after inflation spike – including 30% of those earning $250,000 or more. CNBC. https://www.cnbc.com/2022/06/27/more-than-half-of-americans-live-paycheck-to-paycheck-amid-inflation.html
5 – Hoyt, Brian. (2010, January 28). Removing Oligarchs from Per-Capita GDP. World Bank Blogs. https://blogs.worldbank.org/psd/removing-oligarchs-from-per-capita-gdp
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The opinions expressed in this commentary are those of the author. Comments concerning the past performance of [e.g. monetary instruments, investment indexes or international markets] are not intended to be forward looking and should not be viewed as an indication of future results.
