What NOT To Do During A Recession
Dear Rich Lifer,
It’s been over a month since the National Bureau of Economic Research announced the U.S. economy was officially in a recession.
The memo published on June 8 read:
“The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession.”
The announcement confirms what many Americans already know.
And although the unemployment rate fell to 11 percent last month and we added nearly 5 million jobs, the pandemic is taking its toll.
If you’re worried that your savings won’t last during these unpredictable times, we’re here to help.
While there’s no way of knowing when this recession will end, there are some simple rules you can follow to protect your wealth during this downturn.
For instance, you likely know that you should watch your spending. This is true.
Yet, we believe avoiding undue risk is as important, if not more, as tightening your belt.
By reducing certain risks, you’ll worry less knowing you can control where your money goes. The last thing you want at a time like this is to pay for a surprise.
Here are five things you should avoid doing during a recession.
Taking out a mortgage
To be clear, we’re not saying don’t take out any mortgage. We recommend you avoid taking out an adjustable-rate mortgage.
While there’s nothing wrong with ARMs in good economic times, so long as interest rates are low, your monthly payment will stay low as well.
Where problems occur are during hard economic times. You might be thinking, well interest rates are low now, so what’s the big deal?
This is typical during the early stages of a recession. Then later, as the economy recovers, interest rates tend to follow.
Consider the worst case scenario: you lose your job or your investment portfolio tanks because of the recession. As the economy starts to recover and interest rates rise, so do your monthly payments.
This makes it extremely hard for you to keep up with the payments. And if you miss a payment or your payment is late, this can negatively affect your credit rating, which can make it harder to get a loan in the future.
Our advice: if you have to take out a mortgage during a recession, stick to a fixed-rate mortgage. You’ll sleep better at night.
Becoming a cosigner
This should be obvious but cosigning a loan can be very risky during a recession. If the person taking out the loan loses their job and can’t make the scheduled payments, now you’re on the hook.
It can be especially hard to say no when the person asking you to cosign is a grandchild or a friend. But it’s important you look out for yourself — there’s no shame in that.
Try to find other ways you can help the borrower. You can offer to pay part of a down payment to ease the financial burden or offer a personal loan with terms you decide.
If you feel the need to cosign a loan, make sure you set aside a cushion of money in case things go awry. This way you won’t be putting yourself in a bind as well.
Taking your job for granted
Whether you work for a small business or large corporation, a recession will put financial strain on the company. This usually leads to cost cutting, lowering expenses, cutting dividends, and eliminating jobs.
It’s never a good idea to take your job for granted, especially during a time like this. Make sure your boss knows what value you bring to the table.
Show up early, stay late. Do what you need to do to add the most value to your company during these difficult times.
From your employer’s perspective, it’s easier to cut marginal workers rather than reduce hours or wages of more productive staff. Make sure you’re the later and not the former.
Adding more debt
If you already have some debt, it would be ill advised to take on more right now. Living within your means is critical during an economic slowdown.
For the same reasons mentioned above, you need to lower your exposure to risk by taking control of what you can.
You can’t control what the stock market is going to do or if the company you work for prospers during this time.
If you’re laid off, having minimal debt will make your job hunt less stressful. When you’re worried about how you’re going to pay back a loan, you’re more likely to take the first job offered to you or make risky investments.
Negotiating from a position of desperation is never a good idea and can lead to making decisions you’ll later regret.
By keeping your debt low, you’ll be in a much better position and mindset to recover should you experience a financial setback.
Going all-in with investments
With rock-bottom interest rates and falling stock prices, it might seem like a good time to invest heavily.
Tread carefully. While it’s good to be thinking about the future and growing your wealth, it can be risky to invest a significant portion of your savings.
Early on in a recession is not the time to take big risks. If you’re sitting on a pile of cash, wait until the economy shows signs of sustained recovery before you invest. This will be when prices are still low and capital purchases and labor are cheap.
It’s tempting to “buy the dip” or take advantage of low-interest rates, but it can be near impossible to time. Sacrificing big returns for more sustainable growth will keep you safe should the recession continue. It might not look as sexy on paper but neither is declaring bankruptcy.
The word recession scares a lot of people, but it shouldn’t. By following these rules and managing your exposure to risk, you can spend on the things you enjoy without worry.
To a richer life,
The Rich Life Roadmap Team