A recession is a period of time in which the economy contracts rather than expands, meaning things slow down or even take a few steps backwards. A recession is a natural part of economic cycles, and for every period of expansion there’s always a period of recession. Many of us young professionals may be a little young to really remember a recession, as the last big one occurred in 2008. I was in college at the time and don’t remember feeling the effects of it too much aside from being very thankful for not graduating and entering the job market. I do however remember older friends definitely struggling to find jobs and my parents definitely being worried.

So as we exit one of the longest bull markets in recent history (14 years!) the question arises – how would one prepare for a recession? Of course it’s impossible to know the exact timing of macro economic trends but if you could; how would you prepare and what would you do when it arrived? Are we in a recession right now (October 2022)? It’s hard to say. There are a lot of signs pointing towards yes but a lot of signs pointing towards no. I’m no economic expert but I gauge what is happening in my own world. On the one hand I see plenty of friends posting about layoffs on LinkedIn. But is that an effect of companies that didn’t really make money and grew too quickly? I see things becoming more and more expensive (inflation) which worries me that people would need to slow down on spending but then again people keep buying things! I also notice in my own life Mrs. Money and I trying to buckle down a bit on our spending. But we don’t necessarily need to, it’s more just a feeling/worry we’re having.

So, although I personally have no idea where the economy will go, if I were a betting man (and I’m not), I would say we’re more likely to see a recession than not over the next year or two. That is of course a scary thought to have but now that I’ve said that out loud, what am I doing to prepare?

Keep that emergency fund ready

Frequent readers of the blog will probably roll their eyes as I sound like a broken record here but in uncertain times I like to beat the drum on the importance of an emergency fund whenever I can. 3-6 months of expenses, in cash, in a separate bank account ready to go. I actually felt the urge during the great bull run of 2020-2021 to put some of that in the stock market but resisted. It felt silly to hold cash earning 0.5% at the time when the market was returning 10%+ but I reminded myself an emergency fund is for true emergencies and I didn’t hold that money to make more money, I hold it for emergencies.

In light of a recession if your emergency fund isn’t at 3-6 months, stock it up. Do what it takes to save that cash up. Your future self will be glad you said no to eating out or the movies or that new thing you wanted to buy. If it’s on the lower side of 3 months and you’re a bit more worried, take this chance to get it up to 6 months. You can always invest the cash later!

Realize it won’t be forever, so maybe nothing?

One of my favorite motions to do in times of uncertainty is to zoom out. Try to take a step back and get some perspective on the situation. In economic times I like to look at a chart of the stock market (i.e. the Dow Jones) and remind myself the over the long haul, the bad times aren’t all that bad. So, even if I did nothing, I would still come out in the long haul on top and have more money than when I started. Remember, you don’t lose money until you sell. Fun fact, I actually gained that nugget from NanaMoneyFinance who told me that during the 2008 recession she didn’t sell anything and just stayed the course.

So, potentially I won’t do anything and will just stay the course of investing 15% into my 401(k), investing 15% into my ESPP (employer stock purchase program) and then extra wherever I can into $VTI (my favorite low cost index fund). Sure there will be some pains when the market goes down and I bemoan the fact that everywhere I put my money it loses money, but in long run it won’t have mattered and things will have continued to grow. This has a good chance of being my course of action as I can get stuck in my ways pretty easily and just stick with the status quo.

Somewhere in between ‘cash is king’ and ‘cash is trash’

What I hope to do is adopt more of a cash heavy mentality so I can deploy that cash as things really start to get bad. In 2020 when the market was going buck wild the adage was ‘cash is trash’ and it seemed foolish to hold onto cash when literally everything was increasing in value. On the other side of the coin the adage goes ‘cash is king’ as when things get bad cash is something you really want to hold on to as it’s really the only surefire bet. This to me has proven less useful in the past few years as a) investments have done pretty well aside from this year but on average still pretty well and b) inflation is 8%! So that means if you hold onto $1 today it’ll only be worth $0.92 a year from now. So as much pain as I feel watching my stocks go down I also realize my cash is decreasing in value too!

However, in light of what I believe to likely be a recession, I like to think having cash is smart. Yes I’d like to be able to throw money into the stock market and be able to buy things ‘on sale’ but also having cash will be helpful if things really start to get bad. Who knows for how long or how bad (or if they will at all) thing will get!

Keep my resume updated and my skillset valuable

For many of us young professionals we’re at a point in our lives where we rely heavily on our income. Yes we likely have investments but we’re likely at the stage of life where we’re continually re-investing our money and not pulling any of it out. So, keeping that income stream flowing is quite important to our lives right now. Layoffs can be scary (less scary with an emergency fund IMO) and in a tough economy finding a job might take some time!

I’ve always said that I’m not sure what I want to be when I grow up, and so until then I’m trying to maximize the following 3 areas of a job: making money, having fun and learning. I view learning as super critical at a time in which a recession might be happening. I try to keep my skillset valuable and I try to do so by learning. For example, I’m currently employed in software sales specifically in healthcare. I learn a lot about: business, technology and the healthcare industry on a regular basis. I like to think I could be somewhat valuable in any of those categories. I also try to keep connections fresh wherever I go. So, if something bad did happen at work and I was laid off, I like to think I’m being smart with skillset and network and could find something hopefully sooner rather than later!

It’s also good to call out in this section the value of side hustles. A side hustle is a job outside of your regular job and it’s something done to earn a little extra cash to help pay bills or provide more income for investments or savings, OR a side hustle is something you do on the side with the hopes that one day it can become your main thing that you spend your time and efforts on. If you don’t have a side hustle right now and have some time on your hands, it might not be the worst idea to look into one. It could be a great fall back in case you did get laid off, and extra money especially in this day and age isn’t the worst!

Be greedy when others are fearful

The final thing I’m doing during ‘planning’ for an economic slowdown is remembering the quote from my favorite investor, Warren Buffet. His quote is to be ‘greedy when others are fearful and fearful when others are greedy’. So, during this period of economic slowdown when I imagine a lot of people will be hunkering down and worried, I will try to adopt a mindset of speeding up, or at least to keep going at the pace I’m at. This doesn’t mean I have to act on this mindset and buy a bunch of stock, property or crypto but maybe it means I should be on the lookout to do so. Like I said early on in this post, I’ll probably just maintain my status quo of investing but perhaps I will look for bargains and be ready to pounce!

TLDR

None of us have a crystal ball and so none of us know if a recession is happening, and if it is happening, when it will happen. However, I have a feeling that it might be happening sooner rather than later and in light of that, I am trying to keep a little extra cash on hand, I am trying to keep my skillset valuable, I am trying to remember to be greedy when others are fearful and of course I’m keeping my emergency fund fully loaded!