In finance and business circles, the next recession is always an important topic. People want to predict it and be prepared so they and their business survive. If you are an employee you want to feel comfortable that you will keep your job through a recession. Unfortunately as an employee someone else is always calling your shots. If your company needs to become “leaner” they may let you go with zero notice. So what can you do to prepare yourself for the next recession?
How much living expenses saved?
This is a hot topic because a lot of people have no savings. Comparison to these people is unnecessary. What you need to do is focus on saving enough to cover 6-12 months of your living expenses. This is the bare minimum of savings to have to prepare for a recession.
6-12 months of living expenses.
If this number makes you nervous that’s good, it means you need to change something about your financial life.
When the next recession hits, because there is always going to be a next recession there are two main financial issues to worry about.
- Your stock/investments portfolio can tank
- The stock market gets all the publicity when the economy goes into a recession. The financial markets are the main way people save for their retirement. When the markets go down people’s paper wealth disappears and therefore so does their retirement savings. The scary thing is that these investments are not necessary ever going to rise to their previous highs (at least on an inflation adjusted level)
- You may lose your job
- Unfortunately, if you lose your job it will not be a national new story. Inevitably this will have a much larger effect on your financial, physical, and mental health than your investment portfolio tanking. The easiest solution to this problem is to have a constantly updated resume and a strong network in your industry. However if your industry gets hit hard in a recession there may be no jobs.
Protecting Against Loss of Wealth
It is impossible to go deep into this topic without discussing finance and investments. Instead we will use an simple example involving 2 different investment types.
- Safe Investment: this investment has a lower rate of return and a lower risk in a normal market.
- Risky Investment: this investment has a higher rate of return and a higher risk in a normal market.
These are standard investments that people could have in their investment portfolio. People with a higher risk tolerance would have more of the risky asset and less of the safe asset. People with a lower risk tolerance would have less of the risky asset and more of the safe asset.
The issue with both of these investments is that when the stock market tanks and the economy enters a recession. A person with more of the risky investment will lose more money, however even someone with a large percentage of their portfolio in the safe asset will lose money. Moreover because financial assets are so highly correlated, even the safe assets will decrease in a recession. This is the issue with investing in assets that are publicly traded, the price changes as supply and demand of the asset changes.
Invest in assets where you control the streams of income
- A fully leased real estate property that allows you to know exactly the income it will bring in each month. If you buy a duplex and rent it out completely you will know exactly how much income it is going to generate each month. The value of the property (potential sale price) will fluctuate but the income from the property will be consistent for the length of the lease.
- An online business that is not overly dependent on the rest of the world economy. For example an affiliate marketing in the pets vertical (people won’t change expenditure on their pets much in a recession). A bad online business to run in a recession is one where you drop-ship stuff from China, this could get destroyed if your manufacturer goes bankrupt or takes your product off the market.
Protecting Against Job Loss
There is nothing you can do to completely ensure you won’t lose your job in a recession. Even if you are a top performer and an integral part of your company you are still subject to any of the company’s financial trouble. If your company was growing and had a lot of debt a recession can quickly lead to massive layoffs. The best thing you can do is to keep an up to date resume at all times, and develop a strong network in your industry. However even if you lose your job it may still take you months to find a new job in a recession.
Generate more income
I cannot overstate how important it is to have multiple large streams of income. This website is called income to wealth because increasing your income is the best way to get wealth (not living frugally at a 9-5 job). When deciding what income streams you want to generate you should own the streams of income (stated above).
Think about the opposite situation, someone else having complete control of the income streams. For example investing in the stock of a Fortune 500 company, where you have no say in the day-to-day operations of the company. This is exactly what most people do when they invest their money. They don’t want the responsibility of making their money work for them. Since they don’t want this responsibility and risk they will generate mediocre returns when the market goes up. When the market goes down they may lose all their money. Not a good trade off.
What you need to do is make your income work for you. You need to invest your hard earned money to make more money. My #1 recommendation is to start an online business, either Ecommerce or affiliate marketing. As more people get access to the internet and Ecommerce and online advertising revenues increase your potential profit keeps increasing as the years go on. The best time to start is right now.
My #2 recommendation is owning income producing real estate properties. This is higher risk than starting an online business but it is the most proven wealth generator in world history. All wealthy people own real estate, and most of them generate significant amounts of money from real estate holdings.
There are also easy but consistent ways to make money such as the gig economy, and flipping stuff on Craigslist. If you are hungry for more income to invest in your online business or real estate ventures I highly recommend you start flipping on Craigslist and use the gig economy.