The world has endured a lot over the last couple of years. A global pandemic, a prolonged and devastating invasion of Ukraine, and growing division seeming everywhere. While none of these are unprecedented events, their proximity in time has magnified the cumulative impact and worn at the world’s resolve.
The world continues to move on, if not forward. Disruption in worldwide supply chains, loss of vital farmland, universally high inflation, and loss of faith in leadership around the world, is being felt by everyone. Falling markets, lower earnings, and raising debt are impacting the financial plans of generations young and old.
When the specter of widespread recession looms, what steps can you take to protect your financial future?
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Look at Your Savings
A natural reaction in the face of unrest and falling markets can fall to one of two extremes. Some will be inclined to take every penny they own and buy in, hoping to capitalize on fear, and see their fortune recover during the inevitable rebound.
Others will panic, selling out of falling assets and trusting in the security of cash, hoping for inflation to be tamed, or accepting that the erosion of inflation is still better than the alternative.
The best thing you can do is to avoid either extreme. In times of falling markets your emergency savings become more vital than ever. Not out of fear of more volatile assets, but because having the knowledge and peace of mind that your family’s needs are accounted for will prevent you from making costly mistakes.
Shift Any Variable Rate Debt to Fixed Rate
Uncertainty can upend the best of plans. Luckily, as an individual, you can be more flexible and move quicker than most institutions. If you have any loans or other debt with a variable interest rate, look to see if you can move them to a fixed rate. Locking in a moderate fixed interest rate not only protects you from raising rates, it provides security to your cash flow. Knowing your upcoming expenses can help you make better decisions and bring you valuable peace of mind in uncertain times.
Credit cards may offer an even better opportunity to limit the impact of raising interest rates. If you carry credit card debt where interest rates can increase in a wide range, consider moving the balance to one offering 0% for the first year to 18 months. Avoiding interest as you pay down this debt can help you keep your financial footing. If you cannot pay down all of this debt during this period, you may be able to secure a loan at a more secure rate to pay down the balance.
Take Advantage of the Current Job Market:
Despite everything the world has faced in the past few years, the job market remains strong. With currently low unemployment and companies competing to hire strong candidates, opportunities exist to capitalize on the skill set you have developed through your hard work and investment. The single greatest way to grow your income is often to leverage all your experience and move to a new employer.
Over the past decade, workers who changed jobs saw an average salary increase of just under 15%. The job market will eventually find an equilibrium, and the leverage workers have found over the past fourteen months will shift back towards the status quo. The current opportunity to transition to a company that might not have granted you an interview just two years ago, or to strive towards a higher position, is a unique one our generation has never seen. If your life allows for such a leap, you should take it.
Move to a Lower Cost of Living Area
The past two years have shown employees around the world how remote work can bring back some of the work/life balance that has slowly eroded over decades. The more discerning employers have seen that the technology exists for workers to have a little more freedom in the location/hours they work while retaining their productivity.
More and more employers are open to heavily or entirely remote employees as long as their skills can advance the organization. Companies that once necessitated a high cost of living or expensive commute now see their employees moving to less expensive areas or areas more in tune with their lives (such as nearer family).
If you and your family don’t have meaningful ties to your community, consider if relocation can lower your expenses, simplify your life, or bring you closer to the things that make you happy.
Be Honest When Assessing Your Investments
When one starts accumulating losses, they are forced to truly understand their tolerance for risk. In good markets, it’s natural to overestimate the risk you are willing to take, and it becomes easy to over-commit. As markets change and you experience the downside of the risk, you may find yourself seeking a new balance. While one must be vigilant not to allow emotion, whether greed or fear, to dramatically alter their investment strategy, it is important to constantly reassess if your current allocation aligns with the risk you are comfortable assuming.
How to Protect Yourself in a Recession
Advice is everywhere. In good times, making money is easy, and everyone wants you to know how they did it. In times of uncertainty and market turmoil, many will rush to validate their fear or to be the one to predict the unpredictable. The best reaction to any market is to maintain sight of your specific timeline, goals, and financial standing. Give yourself time to digest any emotion and make small iterative changes.
Over the past two years, I have gradually increased my positions in solid companies that generate consistent free cash flow. While I have lost money over this time, this methodical approach has allowed me to outperform all of the major indexes and should lead to a quicker recovery when the market inevitably turns around.
Times like now are stressful, and in the midst of pain, it can be all too difficult to envision its end, a time when the world returns to some sense of normality. While the opportunities the current environment has presented are unique for a generation of workers, the economic stressors and the resulting fear and uncertainty are not unprecedented. The world is resilient and one day will once again find its footing and march on. Until that time, our goal as investors, as supporters of ourselves and our families, is to simply persevere.