Preparing for an Economic Downturn

We can't predict when the economy will crash. We can only prepare.

Do you know what you'll do if you lose your job or if an illness takes you away from work? Take the steps to prepare for an economic crash.

S&P 500 Index total return over time

We rode a long bull market through 2019. In March 2020, we’re experiencing a swift economic downturn that we all hope reverses course quickly. If you’re caught up in a recession now or anytime in the future, here’s a guide to preparing for and weathering out the storm.

Principles to Preparing for an Economic Downturn

Most of us will experience periods of personal financial stress. An economic recession is when a large percentage of workers experience job loss and spending restrictions at the same time. Lower spending affects the stock market, which then affects how much cashing out and spending many more people and corporations can do at that time. It has a ripple effect on the economy, pushing us into tighter personal and corporate budgets, which then put more pressure on governments for relief.

In the last 30 years, innovation and technology took us out of those downward cycles. Government stimulus support can have an effect as well, but has long-term implications for taxes for wage earners and corporations.

Economically speaking, good times and bad times happen on a cycle. As you can see in the graph above, bull markets (sustained growth) and bear markets (major losses) are to be expected throughout history. We’ve learned personally and larger-scale from the Great Depression of the 1930s. We have Depression Era stories, cookbooks, and government policies that have so far kept us from economic depressions of that magnitude.

On an individual level, there are a few principles you can follow to protect your family and yourself from an economic downturn.

• Minimize or eliminate debt

• Minimize spending

• Increase income beyond regular spending, saving, and investment

• Maximize savings in multiple accounts (investment, retirement investment, and emergency funds)

You might be thinking, “Easier said than done!” Yes, you’re right. It takes consistent effort and usually a different mindset and behavioral changes to make this happen. Once you build up the right habits, it really depends on your circumstances and intensity to predict how long until you’re safe.

Read on to see what to do in bad times and in good times to prepare.

What to Do When Times are Bad (you've lost your job)

But what if you lose your job and don’t have these financial securities? It happens often to people all over the world. In the United States, we have unemployment benefits that cover a certain percentage of your previous income (40-75%) depending on the state and how many dependents you have.

If this isn’t enough, you have a few options:

• Work part time while receiving unemployment

• Reduce your monthly expenses as much as you can

• Sell any items you can

• Call your creditors and explain the situation. Ask if there’s anything they can do to help (deferments).

• Recalculate your monthly budget and prioritize your four walls (shelter, utilities, food, transportation). Find that line - what you will pay for and what you can’t afford to pay - and draw the line.

Yes, you can work part time while receiving unemployment. As long as your part time income is less than half of what you’re getting for unemployment, then your unemployment benefits will stay the same. Of course, rules vary by state. Look your state rules up here.

The best option is to do all of the above and find another job as soon as possible.

Unemployment usually lasts 26 weeks, so you have some buffer to get back on your feet. The current stimulus package extended that 26 weeks, so check with your state unemployment insurance department for their rules and regulations. Creditors can be flexible when you’ve lost your job. They have programs for that.

Remember, your current situation is not forever! You WILL get out of this and find greener ground.

If you’re having trouble with any of the above, reach out and talk with a Financial Coach. We’re here to help you get ahead and stay ahead.

What to Do When Times are Good (you have a job)

When times are good (as in, you’re employed), a few regularly kept habits will keep your family secure when times are not as good:

• Regularly save a portion of your income in government protected accounts (that means FDIC insured in the US)

• Keep a fully funded emergency fund in an account you can access easily

• Become debt-averse, pay off any creditors, and build a positive net worth

The general rule is to not over-leverage your family into large scale debt. A mortgage is okay, but credit card debt is not. Student loan debt and overdue taxes are scary. Payday loans are outright criminal. Get those sharks out of your life.

When you pay off your debts completely, imagine the freedom! Vacation feels different when no bills follow you home.

With a fully funded emergency fund (that’s 6 months of expenses), being furloughed isn’t as much of a crisis. Sure, it still hurts, but it’s not something that could put you on the streets in a few weeks. You have breathing room and still have security.

The name of the game is to save when times are good and rely on those savings when jobs aren't as plentiful.

If you're having trouble getting ahead when you're fully employed, reach out! Saver Street is here to help you get ahead and stay ahead.