Preparing for the Next Recession

Someday, somewhere, somehow, an economic recession will arise. It could be in 2020 or 2025, or… I don’t know; nobody knows. However, unless the problem of economic recessions has been fixed by economic geniuses, a new economic downturn will surely come again. It’s important to be prepared and many of the below suggestions are useful no matter what condition the economy is in.

Zero Debt
Most important, eliminate all your debt. That’s right, get out of debt as quickly as possible. The only debt that is acceptable would be a 15-year mortgage on your house, but that would be it. Credit card debt and car loans are the worst and will surely make your life miserable during an economic recession. If you want to buy a car (used Honda or brand new Lamborghini), use cash. Make it a priority to get out of debt. Get a part-time job at night, do freelance work, spend less money (e.g. don’t go to expensive restaurants), or whatever you can do. It will be a freeing experience to not owe anybody any money. If the economy goes south, you could lose your job or your business could struggle, so not having debt will make difficult times more manageable.

Cash (or a Rainy Day Fund)
Have enough cash to survive on for three to six months (or more). You can keep this in the bank, you don’t have to put it under your mattress, but in the case you do lose your job, you can survive on your savings and not have to take money out of your retirement funds or borrow money. It gives you time to find another job (or start a business). Many people who lose their jobs during rough times go months or even years without finding work. Of course, they try to find employment that has a salary that equals what they used to make. Then they go through all their savings while never finding a job. If this is the case, swallow your pride and work at any job that pays money. This might have to be a temporary sacrifice concerning an uncontrollable situation. During your free time, find that job you think you deserve or start a business. But, don’t sit at home for years because you can’t find a job that will pay you what you used to earn. This is known as life.

Get Rich
If you have zero debt, a lot of cash, and a brave attitude when the recession comes, you can become rich. Google John Templeton and see how he got rich during economic downturns. During the 1937 Financial Crisis which was less than ten years after the Great Depression, he took a chance and purchased every stock that was trading below one dollar per share on the New York and American stock exchanges. In other words, he didn’t have debt, he had cash, and he used the cash to buy cheap stocks. You can do the same. Have cash ready, and buy cheap stocks. Remember, buy low sell high. This could be a once-in-a-lifetime opportunity, if you are ready.

Knowing what stocks to buy is the challenge. Just because a stock is cheap doesn’t mean its a good investment. Therefore, you pre-recession preparation should be researching companies you can invest in when they become cheap. Decide if they are strong and well-managed; decide if they will still be around in ten or twenty years from now. Understand metrics like price-to-earnings ratio (PE ratio), price-to-book ratio (PB ratio), and price/earnings-to-growth ratio (PEG ratio). Learn how to read a company’s 10k annual report which is on every company’s investor’s relations page. You can learn more about the company and their financial situation.

If you don’t feel comfortable investing in individual stocks, don’t. You can possibly invest in real estate when the prices are low. Or, you can start a business. The point is that you can go through an economic recession without feeling any pain and actually prosper, if you are prepared.

Other Ideas
Some “gold bugs” will tell you to buy gold or silver. This may or may not be a good idea. If you look at the charts during the Great Recession, gold spiked. That likely will happen again in some form or other, but gold is not for everybody. You have to store (which costs money) and you can’t buy anything with it. Nonetheless, if you think owning gold is a good hedge against the broader economy, owning some might not be a bad idea. Of course, if it does spike during the downturn, it would be wise to sell when the prices are high. Other libertarian-ish people feel owning bitcoin is a good idea as well. This theory has been untested. Since bitcoin’s inception in 2009, there hasn’t been any economic recessions. So, who knows what will happen to the price when a recession does come our way. If you do buy bitcoin, just be careful; it is extremely volatile.

Those who are prepared won’t even know a recession is happening, especially if they are able to keep their job. Even if they do lose their job, they won’t have crippling debt to worry about, they will have cash to live off of until they find a new job. And for those special few, it will be the beginning of their rich life; just be patient.

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