Alcohol proof refers to the measurement of ethanol content in an alcoholic beverage, and the proof number is equal to twice the percentage of alcohol per bottle volume (50% alcohol is 100 proof). Although I do enjoy 100 proof rum, gin, and whiskey cocktails, the title of this lesson is my clever attempt to introduce the discussion on how to be 100% recession proof.
What should you do to prepare for a looming recession? Well first of all, no one can predict when a recession will happen. There are always signs that one could use to “infer” that a recession is looming. At the same time, there are just as many indicators to suggest a continued economic boom is likely in store. It’s kind of like statistics where you can use data and charts and fancy graphs and trends to tell any story you really want to.
Before looking at tips on how to remain recession proof, we need to review what exactly is a recession. There isn’t really a true definition written in stone for what constitutes as a recession. In economics, a recession is simply part of the economic cycle and begins when supply exceeds demand, creating a surplus of goods. This coincides with consumer goods prices reaching their peak. As a result, prices begin to fall in an attempt for demand to catch up with supply. Less people are spending money because prices are too high which forces inflation to slow down. In the financial world, a recession is defined by when a country’s GDP (Gross Domestic Product) declines for two straight quarters. In Lesson 40, I highlight the primary components of GDP and what causes it to rise and fall.
Although none of us can predict when exactly a recession will happen, there are a number of good habits to have to always remain recession proof, regardless of where in an economic cycle we currently reside.
1) Have automatic recurring deposits into your investing accounts.
Set up automatic and periodic deposits from your bank into your investment accounts. This strategy forces you to dollar cost average into your investments regardless of what markets are doing. This also completely removes any emotions from your investment decision making. It also ensures that you are regularly depositing monies to your savings and investing accounts during any economic environment. Think of it as regular donations to your future self. Your future self will thank you 20 years from now.
2) Have a rainy day fund
If you haven’t already, start a rainy day fund, or top up your existing one. Set a lump amount of money aside for “just in case” items. This comes in handy when surprise expenses come their way. “My furnace just broke down and needs replacing”. “Property taxes just went up on my property by 15% this year and is due in full by the end of the month.” “My car servicing required water pump and timing belt replacement”. None of these expenses are cheap, and may leave you hanging with your pockets turned inside out if you aren’t prepared with a rainy day fund ahead of time. Rainy day funds especially come in handy in the unfortunate event that you are laid off from work.
3) Do a budget health check
Do a review of your current budget to get a sense of your current spending and savings habits, and make an effort to do any necessary adjustments. Maybe this is a good time to lay off on eating out every weekend and limiting it to once every two weeks instead. Perhaps you may want to reduce spending on day to day “want” items like food and entertainment, and increase your rainy day fund balance.
4) Remain employable
This is a big one. What I mean by this is become irreplaceable in the workforce and unique in your skill sets and knowledge that you can bring to the table. Take additional courses, certifications, and other training through your current employer, or even on your own time. Personal development opportunities through your employer can usually be expensed through your employer as well. Heck, even get another degree part time if you’re really up for it! These kinds of things will make you more employable and more competitive over others in the event where an economic recession forces your employer to lay you off, and you are left looking for a new job. It’s an unnerving and unsettling thought to imagine this scenario, and usually unlikely, but it’s always better to be prepared and to plan for the worst when laying all the potential options on the table to become recession proof.
5) Pay off personal debt
Always remain on top of your personal debt obligations and ensure these are always paid off completely as soon as possible. There’s nothing worse than having a hit to your personal steady stream of income while having ample principal and interest payments due for credit card and car loan obligations. You should not be paying 19% interest to a credit card company on a purchase for a jumbo bag of Cheezies from Costco you made last month. Check to make sure you can still meet your debt service requirements now if you were unable to earn income for 3 straight months without having to dip into your long-term investments. This is a telling sign whether you have enough money in your savings accounts or not.
6) Meet with your financial planner/advisor
It’s important to remain on top of your consultations and meetings with your financial planner or advisor (or wealth management advisor or whatever the title is called nowadays) as an added “check” to make sure you are staying on top of meeting your financial retirement goals. If you haven’t done so already, schedule regular appointments with your financial advisor, perhaps quarterly or semi annually, to make sure you are still on track to meet your short and long-term financial goals.
For the more risk tolerant and savvy investors, in addition to remaining recession proof, there are a few additional actions that one can use to take advantage of a recession.
7) Have deploy-able capital ready
This ties in with the first suggestion. Be ready to deploy additional capital into your investments when a recession is happening and markets are tanking. This is obviously easier said than done, but having cash aside in your investment account (5-10% of the total portfolio value) is always wise for these exact situations. Dollar cost averaging at lower prices has huge compounding effects going forward. Remember, low prices are always good. Think of it as the market being on sale. This might be a good time to top up your bond segment or fixed income piece of your portfolio.
8) Take advantage of lower cost of capital
For the more mature and disciplined capital investors, take advantage of lowered interest rates by central banks in response to slowing inflation during a recession. Increase leverage to a tolerable level that aligns with your risk tolerance, and take advantage of extremely cheap debt to finance new capital investments.
Finally, I believe this last suggestion is applicable to anyone for taking advantage of a recession.
9) Be a picky consumer.
When prices are falling, the economy turns into a buyer’s market because competition is steep for sellers trying to get out of whatever asset they are holding. As a buyer, you can be picky and choosy as you have many options available to you, so be patient and be willing to bargain for the best deal possible. You might be surprised with how much a seller is willing to negotiate down in price when they are hungry to liquidate their asset for sale.
Being mindful of these nine suggestions and strategies will ensure that you remain 100% recession proof at all times. This way, when a recession does unexpectedly happen, it won’t be a shock to your system and you can carry on with your day to day life without noticing any real change to your personal financial situation or jeopardy to your long-term financial goals.
I’ll cheers my 100 proof rum cocktail to that.