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Here in Florida, we experience hurricanes that can devastate an entire city. They can turn a city into complete chaos (a la hurricane Harvey and Irma). The good thing about hurricanes is that we know when they are coming. We can prepare by stocking up on water bottles, canned food, and flashlights.
In the midwest, they have a force of nature that can cause the same damage but arrives like a thief in the night. Tornados. They destroy cities without any warning. There’s no time to prepare, and no time to evacuate the city.
I am going to let you in on a little secret. There’s a storm brewing out there. Whether you deal with it as a hurricane or a tornado is a choice. It’s up to you, and only you.
A recession is coming. I don’t know how soon, or when, but it is coming. If I claimed to know, I would be lying to you.
How am I so confident?
I have an out for making a drastic claim like this. There is a fact built into my claim.
There’s always a recession coming. It’s the basic life cycle of an economy. But as the proverbial roses smell their sweetest (right now), people tend to forget that they were dragged through the mud just 10 years ago. You must continue to remind yourself of this.
Consumer Debt
Household consumer debt has risen to a height beyond to the levels prior to The Great Recession. Yes, you read that right. We as Americans, are in more debt that before The Great Recession. People think they have money to blow and it’s beginning to show.
Don’t just take my word for it, here are charts provided by the Federal Reserve:
Student Loans
As you can see, this time around, our debt has a fun filled twist. Record high student loans. Student Loans are already holding many people back from achieving financial wellness. Now, they are choking millennials savings accounts from ever getting ahead. Many people are flocking to companies like So-Fi to refinance their student loans, and for good reason. This is the first step to having an effective payback plan. But, there is still an issue. Many millennials make modest entry level salaries, and still want to live the good life (do it for the gram’), leaving them to pay off minimum chunks of their loans. The financial beast that is the student loan to continues to grow. Leaving those who have a heavy student loan burden, in a difficult position in any recession.
Related: 7 Best Ways to Pay Off Your Student Loans Fast!
Auto Loans
Oh, and there’s also the insane fact that auto loans are at an all-time high. If you want to commit financial suicide, get yourself a car loan instead of saving for your future. Financially speaking, you are a storm chaser heading directly towards a tornado, not even noticing when the cow flies in front of your windshield (shout out Helen Hunt and Twister).
Mortgages
Then there’s the highest debt balances out there, mortgages. It’s understandable, houses are expensive, and nobody in their right mind runs credit card balances above the price of a house. I am all for mortgages. I do however, see data that shows a trend. Home prices are set way above the comfortable wage levels of those buying them. That means people are buying more house than they can afford…AGAIN.
Home prices are already above the 2008 height. They will probably go higher (speculation). That is still not a comfortable level for anyone to want to enter the market. Not only that, it’s a sellers market and houses are going above asking. Real estate agents are demanding you take away your rights (foregoing inspection and other due diligence) just so you can get the house. That is never in your favor as a buyer.
Don’t believe any of my debt hogwash? Here’s a chart from a little known agency called The Federal Reserve. You can get their full report here.
Like I said, I do not know when this lavish spending spree will turn into a recession. If anyone tells you they know they date, write them off. Not a single earthling knows when it will happen. Unless we are all trapped a horrible version of the Truman show.
How To Prepare
That being said, you should be ready when it happens. A few things I would do is:
1. Save a large portion of that juicy paycheck.
This will give you the financial peace when everyone else is in a panic. If you have a large amount saved, you will be able to weather the storm.
2. Diversify your income with a side hustle
A side-hustle can sustain your lifestyle if you lost your job. Having one stream of income is not the best plan, especially in a recession.
3.Wait on Big Purchases
If you are in the market for a new home (especially in big, expensive cities), wait. This is not the time to spend your hard-earned dollars on a huge mortgage. Be patient and enjoy the pros of renting (or the tiny house you own) for a little while longer. If you must own, house hack.
4. Make sure your emergency fund is in tact with six months of living expenses in cash.
It is always a good idea to have an emergency fund. This will hedge against any risk of layoffs, and give you the extra cushion you need to get by and find work again.
5. Eliminate and pay off your remaining consumer debt.
Debt can destroy your plans. In a recession, banks can panic and call for your amount owed. You will be in a much better position if you eliminate this debt now.
6. Don’t try to time the market.
Stick to your plan and keep investing. Invest whether the market is up or down
7. Remove Treat Yo’ Self from your vocabulary.
Don’t spend on lavish luxuries you don’t need. Sell the stuff you don’t use. Less clutter and spending will free up your flexibility to make moves.
How Do Recessions Happen?
To put it simply, it is when a bunch of folks lose confidence in uni-cent, quickly.
You will hear speculation being thrown around as fact. Wall Street wackos will jump on your TV and proclaim that the stock market, and housing market, will go up forever and ever. Like they are reading a fairy tale to their kids before bed.
At this point you will start to see trends. Too many people buying investments because they think it will go up in value, instead of producing income. This is also known as speculation. The mailman has hot stock tips, your waitress just bought 10 houses at retail market price, Uncle Rico just bought a minor league football team while making $8 an hour (because he can throw a pigskin over them mountains).
Then the balloon begins to deflate. A large portion of the market panics (remember how I always say keep your emotions out of investing) and everyone begins to sell.
The banks panic and lending becomes tighter than your favorite rock stars skinny jeans. Businesses can’t expand, which leads to layoffs, and a reduction of consumer spending (see, I knew everyone could live frugally). This cycles a slow spiral downward.
Opportunity is Knocking if You Will Let it In
After that downer, I have good news for the DXD community.
Recessions are full of opportunities for those who are ready for them. This is why I am telling you to prepare now. It’s actually good news for investors. Everything is on sale!
“Whether is socks or stocks, I like to buy things on sale.”
-Warren Buffett
NOW IT’S TIME TO TREAT YO’ SELF
Houses are on sale. Treat Yo’ Self.
Shares of Amazon and Apple are on sale. Treat Yo’ Self.
Index Funds are on sale. Treat Yo’ Self.
Gold is on sale. Treat Yo’ Self.
Money is a Tool
Jokes aside, recessions lead to extreme turmoil in people’s lives. Most people don’t prepare, but if you do, you will be in a position to help your family, friends, and neighbors. Money is a tool, not a game. A tool used to create freedom and give to others. If you begin to prepare you can be the helper, not the helpless.
Conclusion
Those who are patient and make the right choices today will build wealth. Again, it comes down to choice. You can pretend that it will be a bed full of fluffy pillows forever, or you can start getting ready. I don’t know when it will happen. It could be 5 years, it could be 5 months. I do know one thing, buying investments on sale is the fastest way to accelerate your wealth. Hold on to your pants, it’s going to be a wild ride.
Give more, Earn More, Save More.
Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.
Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.
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