In April 2020, I wrote about how the Fed intervened in a massive way to cancel recession. The Fed did a great job in averting demand collapse and was able to keep the economy afloat through the worst of the pandemic.
But, there is no free lunch. The bill has now come due. Earlier this year, in July I wrote about how the recession is officially here.
In the recent Fed meeting, chairman Powell reiterated his stance to keep increasing interest rates even if it means a ‘hard landing’ aka a recession.
The market took note and promptly started declining.
Now that the recession is both confirmed and acknowledged by the regulators and the financial markets, let us look at ways to survive it.
Protect your Income
The first thing to do in a recession is to make sure that your income sources are well protected. If you are employed, then make sure that your job is secure. This could mean doing more at work. Networking internally and ensuring that your work is visible and is of high quality. Essentially, the opposite of Quiet Quitting
If you are running a business, then it could mean checking in with your existing clients. Offering over the top services at no additional or increased costs.
Reduce Risk
During a recession the overall economy is in a Risk-Off mode. This means investors, companies and individuals avoid risk. At a personal level, one should avoid or reduce risk.
If you are employed, then changing jobs or industries, or joining risky smaller companies with shaky financials is to be avoided. In case you are already working at a company whose financials are deteriorating then moving to a larger company with more stable financials is a way to reduce Risk.
If you are running a business, then new ventures and investments that have low probability of success have to be looked at more closely. Remember, recessions means less demand overall and this could mean less demand for your products or services. So, the financial projections for your new ventures need to be re-assessed.
Reduce Debt
The early part of the recession will have higher interest rates. A mortgage that was at 2% just a year ago now costs upwards of 6% now. A threefold increase.
Avoid taking on new debt. In case you have existing debt that has a floating rate, i.e. the interest rate increases with the increase in federal interest rate then it makes sense to tackle it and pay it off as much as you can.
However, in case you are in an advantageous situation where you have a low fixed interest rate from the year before, for example a mortgage of 2% then you are in luck. This means any excess cash should not be used to pay-off debt but be used to invest in fixed income options like savings accounts, bond mutual funds as you can now earn more than 2% in interest.
Cut Down Expenses
Cutting down expenses is something that is more in your control than any of the other recommendations I have made. Understand and analyze your spending. One way to do it is to look at the credit card statements over the last 12 months and categorize your spend into must-haves versus nice-to-haves. Cut down on nice-to-haves as much as possible.
Learn about budgeting and allocate more to savings.
In case you have already FIREd try to withdraw less from your FIRE portfolio. Many FIRE purists might disagree as the 4% Rule upon which the FIRE portfolio is based has been tested for survivability even during multiple recessions. Still, in my opinion having a cushion can be helpful at least from a psychological safety point of view.
Build Reserves
Closely related to Cutting down Expenses is Building Reserves. A recession can be unpredictable. Unexpected expenses, job losses, sickness etc can strike anytime. It will be harder to fall back on loans and credit during a recession. It is highly recommended to build up reserves. 6 months of expenses is a good starting point.
It is all not bad
A recession is a period of being sober after the crazy run-ups we have seen in the financial, crypto and real-estate markets. But, things will not always remain the same. In fact, a recession can be a great opportunity to build generational wealth. More on that in the next post.
HappypathFIRE!