A Financial Survival Guide for the Next Recession

Seeing my own mother struggle through the last recession made me want to be sure I'm prepared for the next one. So I talked to some money and career experts to find out how to recession-proof my life.

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Aug 15 2018, 3:13pm

Illustration by Getty Images / Malte Muller

Miami real estate agent Karen Hollihan remembers the 2008 stock market crash all too well. “When the markets came tumbling down, so did my head,” said Hollihan, who is also my mother. “I remember being in New York City, walking down the street and seeing people watching the TV screens, speechless, and the screens showing crashes of 500 to 600 points per day. This was happening daily. Once, I just broke down and cried.”

What saved her was cutting costs to an absolute minimum and rigorous book-keeping of every single expense and upcoming bill. “Daily, weekly, monthly, yearly—until today,” she recounted. “I know exactly how much I will need for the year, where to save, what my limits are in unnecessary spending,” she said.

Seeing my mom pinch pennies, keep the air conditioning off to save money, and suffer from anxiety was a wake up call. As a freelance writer living in one of the most expensive cities in the country, I'm already painfully aware of how important it is to stay on top of my finances. But with investors predicting the next stock market crash sometime in the next few years, I decided to talk to some experts to find out what I can do now to prepare for the next downturn.

While many young people like me have only just begun to invest and are essentially living from one paycheck to the next, we can protect ourselves from being completely destitute when the economy goes topside. From focusing on lowering debt to acquiring new skills, here’s how to do it:

Smash your debt

Eliminating debt should be a top priority. That's because if you lose your job or investment income in a recession you're likely to rack up even more bills. “Prioritize debts from highest rate to lowest rate, and start paying down the highest rate debts. High-interest rate debt should be addressed first since you do not want that to accumulate and become a greater debt in the future,” said Wendy Liebowitz, a Fidelity Investments Vice President in Fort Lauderdale, Florida.

The best way to reduce credit card or student loan debt is by figuring out how you’re spending money now and how to put more of your earnings toward those bills. Start simply by tracking your expenses so you can see where you’re spending more than you should. “By spending money on what is important to you now, and not spending on the things that are unimportant, you can more easily adapt if a downturn occurs, said Ross Levin, a certified financial planner at Accredited Investors Wealth Management.

Invest smarter

If you have even a few thousand dollars socked away for retirement, now’s the time to make sure it’s not all in one investment. “Having a well-diversified portfolio greatly insulates you from permanent loss,” said Lucas Casarez, a certified financial planner at Level Up Financial Planning. “Making huge bets on a single company or sector can blow up big time; most people don’t realize how much risk they are taking when they are too concentrated with their investments and forget the important role of diversification.”

Instead of obsessing over cryptocurrencies or promising medical marijuana companies, broaden your financial horizons. The general idea is to have a mix of stocks and bonds—index mutual funds or ETFs are the easiest way to get that—as well as some international investments, which you can get the same way. Here’s an introductory guide to investing to help point you in the right direction.

The younger you are when you get your portfolio balanced, the better off you’ll be in the long run. “Investing early and often allows millennials to take advantage of dollar cost averaging and compounding growth over time,” Liebowitz said. Even a big hit in the next couple years will look like a blip on the radar a decade or two from now.

Expect the unexpected

A cash reserve of three to six months living expenses is ideal, but even setting aside as little as $500 will help when times are tight. “This savings will give you the confidence to ride out rough patches that could occur in a recession,” said Casarez. The best place to park this money is in an interest-earning savings account where you can access it quickly.

If even $500 feels like too much due to high rent or student loan bills, it’s time either to take a hard look at your spending or find ways to raise your income. Let’s start with spending since that is the easiest thing to control.

Get a grip on your spending

Are you spending more than you earn each month? If so, take a close look at exactly what you're buying and start making small adjustments. “The big thing to pay attention to is what is the least you can do to impact your situation,” Levin said. “You can choose to skip a concert, but you can’t choose to skip paying rent.”

Want to lower your costs even more? Eat one more meal a week at home instead of at a restaurant to save at least $50 a month, clean out your storage unit to save another $87 a month, or get a roommate to save hundreds of dollars a month. There are literally hundreds of ways to save money if you put your mind to it.

Know your worth

Making more money now will make it easier to stash some away for later. While the simplest way to do that is by getting a raise, these incremental increases often only keep pace with inflation due to wage stagnation. You’ll have a better shot, however, if you have highly valued or scarce skills. “A software engineer for a retail corporation will be less vulnerable than an office clerk in the same company,” said Michel Dilmanian, a Morgan Stanley economist.

Learning new skills to expand your job opportunities should always be a priority. “Computer programming and other ‘hard’ skills should continue to be in high demand relative to other skills,” said Dilmanian. “There is also a shortage in a number of occupations in healthcare, and demand for skilled labor is projected to continue rising as the population ages.” Jobs most at risk are those that provide discretionary goods and services like retail, new vehicles, household furniture, household appliances.

If you decide to invest in new skills or a new career, be mindful of the costs and rewards. “Consider the duration of that next step,” Liebowitz said. “Would you be better off staying put and building a career versus starting over from scratch every few years? Look at the cost and benefits of each option before making a decision.”

Lastly, make a point now of networking with colleagues, both to get a sense of how things are shaking out in your industry as well as to find out about possible job openings. Simply meeting an old coworker for a drink or shooting a note to someone you met at a conference asking how things are going does the trick. The point is to keep the lines of communication open so you’re not just contacting them out of the blue when things head south.

Follow Marco Margaritoff on Twitter.