A recent plane ride had left me a bit nervous before takeoff. The weather at our destination was supposed to be pretty terrible, with a lot of wind and rain in the forecast. I braced myself for a bumpy plane ride. I was also crossing my fingers that my kids wouldn’t get sick on the plane.
Much of the flight was uneventful. I had a window seat, and as I looked outside, I was marveling at how the sky was a beautiful shade of blue. The bright sun was inviting, and as I looked down, the thick clouds resembled a blanket of snow. My rational brain knew, thanks to satellite-enabled forecasting, that the weather beneath those clouds was a different story. It seemed almost impossible that these two worlds could co-exist.
We finally began our descent, and we were soon enveloped within the clouds, stuck in a thick mist. Some turbulence ensued, but thankfully, it was pretty minimal. Eventually, we made it through the clouds. And, just as I had imagined, the world was now dark, gray, and wet.
I held my breath as the pilot guided the plane onto the runway. I expected an especially jolting end to our trip, but this pilot absolutely NAILED the landing. The wheels touched down gently, and some clapping erupted from the cabin. I couldn’t help but thank the pilot and crew as we disembarked the plane.
Now…..what the heck does this have to do with a recession?
A TURBULENT RIDE
For years, there have been predictions that the economy was going to go through a recession at any moment. Regular economic reports, dropping interest rates, domestic and global events….these are all closely scrutinized with experts left and right trying to make sense of the data and predict an upcoming recession (a recession is seeing a decrease in GDP two quarters in a row, so there can be quite lag between predicting a recession versus officially calling a recession).
Well, we’re still in a bull market with no signs of an economic contraction (at least, as of this writing). That would be the equivalent of the sunny, blue skies during my plane ride.
BUT….market cycles happen. Recessions are no fun, but the cyclical nature of the US economy and the stock market is well documented. It is a normal and expected part of a capitalistic society.
The length of this bull market is making people nervous because market valuations are at historical highs. It’s not a question of if, but when the next recession will occur as the economy will eventually contract for a period of time. When the economy contracts, unemployment tends to rise and people tend to spend less, either because they have to or because they’re afraid to.
It’s going to be a bumpy ride. It’s going to feel uncomfortable and scary. It’s going to look ugly. Just like the gray, dreary, wet skies that I encountered during my plane ride.
So how do we best prepare ourselves? Getting your financial ducks in a row BEFORE the turbulence hits is a fantastic way to set yourself up for getting through the next recession with as little stress as possible.
Here are 10 ways that you can take to prepare for the next recession:
1. SAVE ABUNDANTLY
Do you have an emergency fund? Will you be prepared in case you experience a job loss or a decrease in income due to a recession? The effects of not having a sizable cushion can be devastating if you’re going into debt or borrowing against your future (raiding your 401(k)) in order to make ends meet. Aim for 3-6 months of expenses sitting in a very liquid account, such as a high-yield savings account.
2. LOOK AT YOUR BUDGET
When was the last time you looked at your budget? Are you intentionally increasing that gap between your income and spending? Remember, whether you’re making $50,000 or $5 million, the same rules apply- you must spend less than what you make in order to build wealth!
Are you living below, at, or above your means? If you’re living paycheck to paycheck with nothing left to save at the end of the month, then you NEED to re-evaluate where your money is going. Understanding your cash flow is FOUNDATIONAL to making any necessary changes to your finances.
3. PAY DOWN DEBT
Are you awash in consumer debt or high interest debt? Are you aggressively paying off your debt using a debt snowball/debt avalanche method, or do you plan to stretch out your payments as long as possible?
If you have student debt, do you have a separate plan for how to pay them off? Remember, student debt is very different from traditional debt due to the option to have your loans forgiven. If you plan to have your loans forgiven, then you will need to understand the strategy (aim to get as much forgiven as possible) and make sure that you are also taking care of your other financial obligations.
No matter which strategy you choose, make sure you HAVE a strategy. Understand who you owe, what you owe, how much you owe, and when you plan to pay off your debt. If you experience a drop or loss in income during a recession, then continuing to service your debt payments will feel even MORE painful than it does now!
4. CONTINUE INVESTING IN YOURSELF
Your education doesn’t stop with attaining your DVM upon graduation. You are CONSTANTLY learning, whether you realize it or not. Always invest in yourself and the unique skills that you possess. Emphasize your strengths and work on your weaknesses. You should invest in yourself professionally AND personally. It’s easy to get caught up with all of your other responsibilities to everyone else, but remember to make time for YOU.
Honing in on your strengths will make you a strong job candidate in case you’re needing to find a different place of employment in the future.
5. START A SIDE HUSTLE
Have you considered other ways to earn income outside of your main job? Side hustles are becoming more popular, thanks to more opportunities, a low barrier of entry, and various ways that people can start their own businesses.
Just because you’re a DVM doesn’t mean that you’re confined to one type of job. You are perfectly capable of using your degree in different ways outside of your primary job. You can also start a side hustle that has nothing to do with you being a veterinarian- you are more than your professional title! If you have a strong desire to explore some options, get creative and see where it will take you!
6. TAKE A LOOK AT YOUR BENEFITS
When was the last time you evaluated your current workplace benefits? Retirement accounts, healthcare plans, paid time off, stipend for CE, etc are extremely valuable. This becomes painfully apparent if you ever lose access to these benefits and you need to pay for them out of pocket. Make sure you’re not missing out on opportunities to fully maximize your benefits.
7. CHECK YOUR INSURANCE
Take a look at your current auto, home, life, liability, and disability insurance coverage. Do you have enough insurance? The purpose of insurance is to cover those catastrophic events where a typical emergency fund simply won’t cut it, so you want to make sure that you are properly covered in both good times and bad. If you are not adequately insured, do your research and choose options that make the most sense for your current life stage.
8. REFINANCE YOUR LOANS
Interest rates are at all-time LOWS at the time of this post. If you’re in a position to refinance, whether it’s for your home or for your student loans, then check out your options! You can use this calculator to figure out if it makes sense to refinance your home. Go through this checklist of questions to see if this is a good time to refinance your student loans.
By lowering your monthly debt payments, you have the chance to aggressively pay off your loans and get to debt-free sooner rather than later! Facing a recession while being debt-free, or at least having significantly less debt than you currently owe, is a worthy goal to have.
9. CHECK YOUR ASSET ALLOCATION
Have you checked your portfolio asset allocation lately? How is your stock to bond allocation? A rule of thumb is to have your age in bonds and the rest in stocks. Another calculation is to have your stock allocation equal 110-your age. This means that a 40 year old would have a 60/40 stock to bond ratio with the first example and a 70/30 portfolio with the second example. How close are you to these guidelines?
Predicting that you would be okay with a 20-50% drop in your portfolio during a recession versus actually living through it are two different things. If you have an inkling that you’d be panicking during a market downturn, then think about rebalancing your portfolio so that it’s more conservative (more bonds, less stocks).
10. THINK LONG TERM, NOT SHORT TERM
Remember, when it comes to personal finance, you are always balancing your short and long term financial goals. We are often fixated on whatever is urgent at the time (short term) without putting enough emphasis on the long term. This is human nature, and unfortunately, it does NOT work in our favor when it comes to prioritizing long term goals.
Retirement savings is the quintessential long term goal, so in order to circumvent our human tendencies, find ways to make this as pain-free as possible. Making your contributions automatic works quite well. With a simple set up, you’re consistently investing without any further work on your part!
Visualizing WHY you want to contribute to retirement is another way to make long term planning easier. Whether it’s palm trees, a hobby farm, or volunteering at your favorite organization, images are very powerful motivators. Being able to look past the short term goals and understand that you’re well on your way to achieving your long term goals is a huge confidence boost.
As you can probably tell, financially preparing yourself for a recession looks very similar to what you should already be doing with your money. It’s all about getting your financial ducks in a row so that you’re better prepared for whatever the future has in store for you.
I am grateful that the pilot for my flight was well prepared for the storm. When it comes to your finances, remember that YOU are the pilot! You certainly don’t want to be the pilot who pretends that the weather is going to be great 100% of the time, a pilot who ignores warning signs or doesn’t properly plan or prepare for those less than ideal weather conditions. You are in control. You have choices. You WILL be the best pilot you can be, no matter the weather conditions.
The skies may turn gray and dreary, but with the right expectations, preparation, and planning, you’ll get to the other side in great shape!
Are you concerned about an upcoming recession? What are you doing to prepare? Comment below!