Lots of people have written me in the recent past asking me how I am preparing for an economic downturn. Take, for example, this email from Arnold:
A lot of major publications (The Economist being the biggest) have been predicting that the US will have a recession this coming year. My question has to do with preparing and surviving during a time of recession. Also, another idea would be how to work with the dropping in value in the dollar.
First of all, I think most mainstream articles on economic downturns are sensationalist. For most people leading normal, everyday lives, an economic recession doesn’t mean too much. Unemployment might rise some, but mostly it’s companies trimming fat – stable companies don’t fire good employees because of downturns.
If you’re worried about the economic downturn affecting your financial status in a significant fashion, there are one of several possibilities going on, most of which have more to do with your own choices than the market:
1. You’re concerned about your job performance and that you might be considered part of the “fat” at work. This concern usually comes from people who are underperforming at their job
Solution: Work harder, and keep track of what you do. Do what you can at all times to maximize your career and have a very good performance review. Here are fifteen things you can do right now to help, along with fifteen more.
2. You’re concerned about the long term health of your organization and you think a recession could kill it. Think about people working for Sears and K-Mart, for example. Those companies are sinking fast and could possibly go belly up in the next few years, triggered by even worse revenues from a recession.
Solution: Polish your resume and move on with your career sooner rather than later. It’s never a bad time to get out of a sinking ship. Figure out what you want to do with the rest of your life and move forward with that plan.
3. Your money is heavily in the stock market and another slide like the one from 2000 to 2002 would be devastating. You know from the past that recession means downturn in the market and you’re very worried about losing your investments you’ve built up.
Solution: Go conservative if this is keeping you up at night. Move heavily into bonds, for example, or into real estate by having your future buying go into these areas. Sell your stocks only if your ultimate sell date is coming in the next five or so years – otherwise, hold on for a roller coaster ride. During an economic downturn, a stock-heavy portfolio will not do well, but over the long run it will.
4. Your financial situation is so loaded with debt that if anything bad happens at all it collapses like a house of cards. People who are in debt up to their throats are kind of panicked right now, and deservedly so: if easy credit dries up and the economy goes down, their lives could be in deep trouble. If a job loss means you lose everything, you’re in deep, deep trouble.
Solution: Start living within your means. Build up an emergency fund, then start seriously tackling high interest debts. You need to buckle down now so everything doesn’t collapse later, so stop spending money and instead start eliminating debt and saving.
Here’s the real message: you control your economic future, not some Wall Street banker. If the economy goes sour for a while, you can make choices so that you sail right through it without a worry in the world.
Don’t let the fearmongering keep you awake at night – if you’re making sound financial and life choices, you’ll be just fine over the long run.