The idea of losing one’s job during a recession is enough to make anyone panic. Within a short amount of time, a recession can lead not only you and/or your spouse but also family members who depend on your income, to lose everything you have worked so hard for. The stress from such an event would be overwhelming at best; imagine feeling this every single day as you try desperately to figure out how long it will take before things finally improve again – if ever? The aftermath of the Great Recession in 2008 still haunts most people because of the lasting impact it had on so many Americans. In the Great Recession, the unemployment rate climbed as high as 10%. The US stock market loss roughly 50% of its total value from 2007 to 2009 and it took over five years for the stock market to full recover from its losses. Six million American households lost their homes during the great recession and a staggering 1.8 million business went under. The recession not only caused huge financial damage, but it also affected the mental health of individuals. It changed the health not only of those who personally suffered job, income, or housing loss, but the entire population. The resulting anxiety can give the feeling that our goals are now out of reach because of the losses we have suffered and that the stock market will go down forever and never come back. It is important to realize that we cannot control nor prevent a recession from happening. It is a part of the economic cycle. Instead, we need to be aware of the things that we can control if we are to not only survive the next recession but thrive once we are past it. I am going to share with you the five ways to get into the right mindset to survive the next recession.
Review and adjust your monthly budget
As the saying goes, be ready so that you don’t have to get ready. Reviewing your budget is one of the first thing you need to do to be ready for a recession. If you don’t have a budget, you need to start on one ASAP. How much do you currently have in cash reserves to weather the effects of a recession, a possible job loss? Rule of thumb says have anywhere between 3-6 months’ worth of your monthly expenses because that is how long it could take you to find a new job if not longer. Does your daily Venti Iced shaken espresso from Starbucks count in that monthly expense equation? Depends on who you ask. It is important to take a hard look at what you are spending your money on. Now might just be the time that cutting back can help you be mentally and financially ready for any future recessions that may happen. Break down your current spending into two separate piles: discretionary and non-discretionary. Non-discretionary expenses are your necessities; rent or mortgage payments, utilities, water, gas, electricity, groceries, clothing, insurance, and other important bills. Discretionary expenses are the non-essentials; daily trips to Starbucks, shopping, eating out every weekend or Happy Hours at the bar. Cutting back on your spending in anticipation of the next recession can help you prepare for tough economic times ahead. A budget is crucial to this process and sticking to it will allow you to notice areas where there’s room for cuts that may otherwise go unnoticed. Focusing all available funds towards savings means being financially ready when needed.
Combine or end your high interest debt
Carrying debt with high interest rates into a recession can be stressful. The most common high interest debt that people carry is credit card debt. With interest rates on the rise, holding on to that debt becomes more expensive. Having good credit is important but keeping that good credit is equally important. Good credit opens the opportunity to look at options that you might not notice but should consider taking advantage of. If you carry credit balances, try inquiring with your credit card companies if they have any special promotions running for credit balance transfer that you can take advantage of such as a low APR for a 12–18-month period. If you can get a 0% APR balance transfer offer that is even better because it will give you the ability to improve your cash flow and build up your savings by cutting interest payments for that promotional period. However, be sure to find out all the terms of the transfer first before starting. Usually, the credit card companies will charge you a percentage fee for the balance transfer so be sure you understand the terms first. This strategy can help free up some cash flow for you and your family, give you the opportunity to pay lower interest on your balances which in turn can help you pay down the balances faster and help you build up your savings at the same time so that you will be ready for the recession, whenever it comes.
Have a Financial Family Meeting
In a recession, it is likely that your entire family will be affected by it one way or another. You may have to cut extra-curricular activities for the kids such as weekend sports or family trips to Disneyland. You and your spouse may have to cut back on weekend date nights and weekend getaways to free up cash flow. So that everyone in the family is on the same page on what to expect and changes the family should consider making to survive a recession, it’s important for the family to sit down together and review their short-term goals (6-18 months) as well as mid-term goals (24-46 months). Reviewing your financial goals together will bring about the opportunity to discuss which goals are most important to reach and which ones have flexibility to be put off until a later date. Do you have enough in assets to help you reach those short and midterm goals? Say for example a goal is to bring the entire family to Walt Disney world in 2 years. Another goal may be to update the kitchen in 2 years with new appliances and renovations. Both are important goals, and both come at a cost. If you currently don’t have enough in cash reserves and can push one of the goals back, that could free up additional cash which was originally earmarked for that particular goal but can now be set aside and used pay for monthly expenses in the event of a lay off during a recession.
Hire a Financial Advisor
Having a financial advisor can be make a substantial difference in your mindset and your ability to survive and thrive after a recession. Work with an advisor that will sit down with you and talk about more than just your money and your investment returns. Your advisor should be looking at your entire financial picture to help you be ready for the next recession and keep you focus on reaching your goals. This means looking at your budget, your cash flow, your risk management strategies, your tax situation, your investment allocation, and investment philosophy. Your advisor can help you analyze your budget to find any areas that can be improved on to free up cash flow and increase your savings. You might be contributing 10% into your 401(k) right now but should you consider lowering your contributions to 5% per paycheck so that you can save a little extra each month into your cash reserves? They will sit down with you to review your short-term, mid-term and long-term goals and work with you to figure out which goals are still important to keep, and which ones can be adjusted or eliminated if necessary. You advisor will review your investment allocation in your 401(k), investment portfolios, college 529 plans, and other financial items to make sure that you are taking on the right amount of risk based on your needs, risk tolerance and time horizon to achieve your financial goals. A good financial advisor who is also a financial planner will create a financial plan for you that will serve as your blueprint to achieving your financial goals. Most planners can simulate multiple scenarios with different goals and expectations while considering portfolio risk and market volatility to see which scenarios can supply the best possible outcome for you and your family. They should be able to communicate with you with confidence any concerns they may have about your ability to reach your financial goals and come up with alternative solutions that serve in your best interest. Collaborating with the right financial advisor can help you weather the storms of a recession and leave you feeling safe, secure, and confident in your ability to reach your financial goals.
Cultivate a Thriving Mindset
You created a budget and cut discretionary expenses, giving way to an increase in your monthly cashflow and increasing your savings contribution. You have dropped high interest debt through paying off the balances or taking advantage of low interest balance transfer opportunities. This improves your monthly cash flow and potentially makes your debt payments more manageable which can lead to paying down your debts faster and/or build up your savings reserve. You’ve had that family meeting to discuss and review your short-term, mid-term and long-term goals and decided on making the right adjustments that are necessary to feel financially confident going into a recession. You have hired a financial advisor that has looked over your entire financial picture and suggested recommendation that are in your best interest and put you and your family in the best possible position to survive a recession. If that advisor is also a financial planner, they most likely have created a financial plan for you. That plan serves as your blueprint, providing you with the data, recommendations, and solutions you need to pave the way towards reaching your financial goals. Having a financial plan and regularly updating it can give you the mental confidence and assurance you and your family need, to stick it out during the toughest times in a recession because you know you have made all the necessary adjustments and taken the right actions to be in the best position to not just survive a recession but thrive after it. Remember you can’t control when a recession happens or prevent the stock market from crashing. The best thing you can do for yourself and your family, is to take control of what you can control, and you will be ready for whatever comes your way.
My name is Kristoffer Fu, CFP®, CPWA® and I am the Founder and Chief Executive Officer at Maven Bridge Capital a Wealth Management Company based in Orange County, CA. At Maven Bridge Capital we are dedicated to helping Women and Small Business owners achieve financial freedom through our personalized holistic planning approach. We focus our efforts in helping our clients reach their financial goals as well as helping them secure a legacy for their families. Reaching a new destination always involves some level of risk, but it’s important to remember that you can minimize those risks by having a plan and being willing to adjust as needed. If you’re looking for help in developing your own personalized financial plan and need wealth management advice, our company is here to help you. With over 15 years of experience managing wealth for our families, we have the knowledge and expertise necessary to help you reach your goals and achieve and unlimited return on life. Contact us today for a free consultation and let us show you how we can help you reach financial freedom. Please see our contact information below.
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Brea, CA 92821
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