Things don't look good. Consumer confidence falls like a rock. Eggs are $10.99/twelve on Safeway. Inflation is rising everywhere. The Atlanta Fed estimates GDP will turn negative in the first quarter. Unemployment will explode next month due to liquidation of government staff. Businesses are delaying hiring and expansion due to high uncertainty. The stock market is in a free fall and everyone's retirement portfolio is thinning. The Tariff King spent his life in a trade war, annexation plan, deportation and missile strikes. Ordinary people are very scared and we are rushing towards the hatchery. Yes, all the debris are going down here.
The recession is uncertain, but the average person should prepare for one. If you wait for the recession to hit, it's too late. There are 5 things to do before the recession.
1. Understand your cash flow
When times are tough, cash flow is king. You need to gain intimacy through fixed costs, discretionary expenses and various sources of income. This way, you will know how to reduce your spending and figure out what to do next. Here is a more detailed article to learn about your cash flow. You need to know where your monthly money is.
2. Prepare to reduce income
The biggest problem with a recession is loss of income. If your income remains stable, a recession doesn’t matter. You just keep working hard and keep paying your bills. This is a good time to invest, as you can accumulate more shares at the same amount.
Unfortunately, businesses will decrease during the recession. Many workers will lose their jobs or work less time. Your income is also likely to drop. That's why you need to understand cash flow so you can adjust as needed.
If you have a lower income, can you continue to live the same lifestyle? For most families, the answer is no. Most families pay their salaries to paychecks with little savings. Even if you have an emergency fund, how long will it last if you don’t have a job? If you understand cash flow, you will be able to plan better.
Anyway, everyone should prepare for a reduction in income. It is safe to have no work these days. Even government staff were fired. Anyone can replace it.
3. Come on your emergency fund
Do you have an emergency fund? When you find a new job, will it last long enough? When a recession is imminent, you need to strengthen your emergency fund.
Personally, I'm not very good at emergency funds. Over the past few years, I usually keep my cash expenses for about 2 months. I invested almost all of our extra money because I wanted to put it into practice. Our revenue stream is solid, but that is changing. Mrs. RB40 may retire soon and her income will disappear. My hotline income is not stable. We will need to start leveraging our investment sooner than I thought. This is good, but we need to strengthen liquidity. When the economy is unstable, we need more cash.
The stock market is in a state of turmoil. It is already in a corrected state (10% reduction). The recession will lead to further decline in stocks. This would be a bad time. That's why I've been stepping up my cash savings over the past few months. Now we have about 1 year of cash spending and 1.5 years of I bonds. We are ready for recession.
4. Assess your risk tolerance and adjust your asset allocation
The stock market has performed very well over the past 15 years. Many young investors have never experienced a long recession. It looks like many people are already panicking about the 10% correction. They asked if everything should be sold and moved it before cash, and the stock market crashed further. This is a bad idea because most people don't know when to jump back to the market. The timing of the market is very difficult and most of us cannot do it optimally.
A better plan is to identify your risk tolerance and build an asset allocation that you can stick to. This way, you can have a bear market environment. If you are young, you need to continue investing. In 20 years, the stock market will be much higher than today. A stock market crash is just an opportunity to buy more stocks.
However, if you are older, your risk tolerance will be reduced. I will soon be 52 and I can't stand 50% of my net worth. When the market crashes, I don’t have the money to invest. It's all about the preservation of capital now. That's why I'm much more conservative than I was when I was a kid. Currently, approximately 60% of our portfolio is invested in the stock market. If the stock market falls 50% tomorrow, our net assets will fall by about 22%. I can stand it, we can let it ride for 2.5 years.
If the stock market falls 50% tomorrow, can you keep investing? If not, you need to assess risk tolerance and adjust asset allocation accordingly.
5. Minimize news consumption
Once you have done these preparations, you need to avoid news. Confusion is too stressful. I've been losing sleep due to all the madness in the news. If you can’t do anything about it, it’s better to minimize your news spending. The more you watch the news, the more pessimism you will feel about investment. You're going to sell for sale!
Unfortunately, things get worse and better. I will take care of the things I can control and ignore the rest. My mental health cannot cope with this psychological attack.
Are you ready for recession? What would you do if your income fell? Good luck to everyone…
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Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects all over the United States, so check it out!
Joe also strongly recommends providing personal capital to DIY investors. They have many useful tools that can help you achieve financial independence.
