Preparing For and Surviving an Economic Downturn

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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.

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41 thoughts on “Preparing For and Surviving an Economic Downturn

  1. THANK YOU for not contributing to the media’s hype. This is an *excellent*, timely article. Working in the financial services industry, I get so sick of the media scaring people all the time with their dooms-day talk. Live within your means, invest for the long term :)

  2. “Unemployment might rise some, but mostly it’s companies trimming fat – stable companies don’t fire good employees because of downturns.”

    Ummm… it does happen. In many companies this is much more of a political decision than most realize. Often “good employees” are let go in favor of the better politically-connected employees. I’ve seen it happen many times.

    There are some very large layoffs looming in the financial sector. When a company lays of tens of thousands of employees, they often cut out a lot of “good wood” along with the “dead wood”.

  3. I think the best thing a person can do regardless of the general economy is to manage their “career security”. “Job security” is dead, at least in the U.S. Even if your manager wants to keep you employed, they may have to lay you off. (I speak from experience having been a mid-level manager at a very well-respected company that was world-renowed for treating employees well).

    What is career security?
    For me it consists of:
    1. What I have done. Many different significant accomplishments are much more secure than the same accomplishment over and over again.
    2. Who I have worked with and the impression I have left with them. All of my job transitions since I got out of college have come through my personal network.
    3. My financial stability. When I got laid off from that company I referred to above, I was not especially stable — I was carrying car loan debt, credit card debt, etc… Now, four years later, I am facing some uncertainty, but I am very financially stable — what a difference in my attitude! I am not afraid of the future.
    4. What I know how to do. I think doing is better than learning, but I found that when I went outside the confines of the big corporation I worked at for 20+ years, having credentials is useful. I’m now enrolled in an MBA program. Much of what I’m learning in the classroom are things I’ve already done many times (e.g. write a business plan). However, three little letters is a lot simpler way to explain what I know how to do.
    I don’t think anyone, no matter how valuable they are to a company, is secure from layoffs in a downturn. But, I think a person can weather a layoff a lot better if they have managed their career security all along.

  4. I love the article, and I agree with the point that most people’s lives do not change much in a downturn.

    However, I have to disagree with this statement – “stable companies don’t fire good employees because of downturns.”

    I have seen many VERY GOOD employees get let go during tough economic times. Often the good employees are higher paid, making it more lucrative for the company to cut them.

  5. Very good points.

    I would also add that if most of one’s money is in single stocks to sell all of that stock immediately and put that money into good growth-stock mutual funds with very long track records of strong growth. Ideally, find some funds that have been around for 30-40 years, or longer, and have a return over 10%, particularly through previous recessions and market dips.

  6. My job is stable with little downside and little upside potential.

    I worry more about an economic upturn than an economic downturn. (Economic expansion –> more employment –> more household formation (e.g. unemployed twentysomething living with parents gets a job and moves out to rent his own pad) –> lower rental vacancy rates –> higher rents –> fewer dollars in my pocket.

  7. The difference between a “good” employee and a “not so good” employee often lies in the perspective. Very few people think that they or their friends are not good employees.

    Speaking as a corporate officer who regularly cuts loose the bad wood, I never get rid of a good employee. My industry is in the midst of a severe downturn (housing), yet the good employees will stay and I’ll use this opportunity to upgrade staff.

    Even if some manager is short-sighted enough to get rid of a good employee, someone will snatch them up pretty quick. I have a friend who has worked over the years for three different health-care organizations that have been bought out. He has never gone more than a few minutes without a job.

    The key is to sharpen your job skills, sharpen your people skills, and think like a CEO.

  8. During an economic downturn, a stock-heavy portfolio will not do well, but over the long run it will.

    Perhaps – but say you sold it now, purchased bonds or gold, then sold and repurchased the stocks in the future when they are worth less? Assuming what you purchased did better then the stocks, you would be able to purchase additional stocks than you would have if you had simply keept the stocks.

  9. Hmmm. I think it’s possible something far worse than a minor recession might happen. (This is due to the far-reaching effects of peak oil.) I don’t think it’s scaremongering or sensationalist to want to be prepared.

  10. The greatest impact any “slowdown” has ever had on me is the housing market. My house is now worth less than I paid for it. I could see the loss of equity throughout the nation having a major economic impact.

  11. The only good point of advice is #4, live within your means.

    Unfortunately, just as many good workers as bad are laid off. It is easy to believe it’s only the dead wood if you have never faced a layoff yourself.

    Sears and K-mart are not about to go under. Sears Holdings is sitting on a pile of cash despite the poor performance in the retail stores.

    Bonds have proven to be a lot less safe than people thought. The “safest” bet would be a CD, or government treasuries. CD’s are paying pretty decent rates for being totally guaranteed by the FDIC.

  12. “Hmmm. I think it’s possible something far worse than a minor recession might happen. (This is due to the far-reaching effects of peak oil.) I don’t think it’s scaremongering or sensationalist to want to be prepared.”

    Monica, I tend to agree. I suspect that the combination of the mortgage mess (with estimates of about $400Billion in losses and that’s not even counting home equity loss) and the housing slowdown as well as the US Auto industry being in the dumpster will lead to a rather severe recession the likes of which we haven’t seen since 1981. Add in peak oil and it’s a nasty mix. I remember the ’81 recession. It was very difficult to find work.

    That’s why I really appreciate this blog: lots of good advice on frugality and saving money. Time to get your emergency fund funded to at least 6 months living expenses – I’m at 8 months now, aiming for 12.

  13. While we might all like to think that we are above median employees, clearly that is not the case. The fact is that for many of us, “being a good worker” is not enough. So I do think it’s good not to be to complacent and always be prepared. Preparation does not mean living in fear, though.

  14. You make some excellent – and rarely discussed – points about the real life impact (or lack of impact) an economic downturn has on most folks.

    I’ll do you one better, and suggest that an economic downturn might be a GOOD THING for most Americans, with the BIG exception being the truly needy. Heresy I know, but during this record time of record prosperity, we’ve gone further in debt and increased our consumption to unsustainable (environmentally) levels. What’s more, we’ve lost sight of the simple fact that the most important things in life have nothing to do with more money or more stuff.

    Maybe it’s tough love, but might it just be that an economic slump will bring us to our senses?

    -Jeff Yeager, The Ultimate Cheapskate

  15. Yeah, what they said above.

    During a recession, I’ve seen companies get rid of entire groups, or even divisions, to bring costs into line. It’s hard to predict. Lots of good people get lost on the cutting room floor. But then we’re already familiar with this due to the outsourcing trend of the last 7 years.

    I wonder what Google would do?

    If we do hit peak oil, there could be fringe benefits – to the environment. That Hummer might not look so attractive at $5/gal gas.

  16. I love this site! I’ve been a loyal reader for quite a while now, and this blog has really connected with me on many levels. I just gave my two weeks notice to Sears a few days ago. Once again, you hit the nail on the head!!

  17. They say there is going to be a recession because their is a Republican in the White House.

    It’s called demagoguing.

    The economy is doing fantastic. The MSM will never admit to that because it isn’t their prerogative.

    Nobody has to worry except the people with lots of debt and sub-prime home mortgages.

  18. Some places are a bit scarier then others right now. In Michigan it’s getting tough, even for the financially sound, because there aren’t many new jobs coming in, but lots are leaving, housing values are way down and homes aren’t selling, they are foreclosing, more frequently due to job loss then to over extended credit or adjustable rate mortgage, at least that’s the case in our area. one of the many problems with an economy based primarily on one industry. When that industry is down or bleeding jobs it affects state workers like teachers, law enforcement etc, and retail, local restaurants. During a vistit to MI the governor started to ask Pres Bush a question about the state’s economy and he cut her off saying, I can’t make your auto industry profitable…Yikes!

  19. This whole thing is spoken like a 29-year-old. Let us know how you feel about job security in 15 years or so.

  20. The economy is doing fantastic. The MSM will never admit to that because it isn’t their prerogative.

    When will this fantastic economy trickle down to the minimum wage sector?

  21. I noticed that you didn’t discuss the decline of the dollar. Do you think that it will really only have a small effect on investors? What about people planning on spending time abroad? I have lots of friends going abroad starting in Fall 2008 and I would be curious to hear your advice for them.

  22. To Kevin @ Change Your Tree:

    demagogue: noun. to treat or manipulate (a political issue) in the manner of a demagogue; obscure or distort with emotionalism, prejudice, etc.

    Pot, meet kettle. Kettle, pot.

  23. “Nobody has to worry except the people with lots of debt and sub-prime home mortgages.”

    I’d say that’s a rather large portion of the US population, and as such, a large problem.

  24. After you have lived through a few recessions you start to get that feeling of deja vu all over again. Like now. The real inflation rate is much higher than the government states, just look at your energy and food bills. Consumer interest rates are ratcheting up rapidly. Anybody else remember 18% mortgages? Why do you think job hunting is such a popular topic on this very website? Just look at the book club selection we are currently reading. The government identifies recessions in hindsight, we can feel it now.

  25. I didn’t see any mention of using our awareness of these conditions as a reason to become more politically involved. If we look at the US through the lense of personal finance how is it doing? What is it doing to snowball its indebtedness? How balanced is its budget? You started off by mentioning the fear induced by the media, what about the continuous use of it by our government?

  26. (When will this fantastic economy trickle down to the minimum wage sector?)

    If your only making minimum wage, you are not trying very hard. People who can’t speak our language come to our country and make more than minimum wage.

  27. Trent – Should I be skeptical of taking a new job that pays much more right before the start of a recession? If this company needs to lay off people, will I be the first to go since I am the newest one on? This is a pretty large company in the transportation industry, which could be affected by oil prices. Should I reconsider?

  28. My company recently cut an entire team, most of whom had been with the company for years. I don’t think just doing a good job necessarily ensures job security. Things happen.

    I agree that the best thing to do at any time is to get one’s financial house in order and out of debt. One of my main motivations for living frugally is that I feel more able to survive in times of trouble.

  29. 1. Get out of debt.
    2. Have at least a year’s worth of living expenses in savings.

    Other than that, there’s not much most individuals can do, realistically. At any rate, those two steps are things everyone should try to accomplish whether or not they expect the Four Horsemen of the Apocalypse to come galloping over the nearest hill.

    If you’ve done those things, you might as well relax and quit worrying. Economies go up and economies go down. Recession is as inevitable as death & taxes, sooner or later…and there’s not a thing anyone can do about it.

  30. I agree with your overall point that the media tends to be a bit alarmist about pending recessions.

    However, I think this statement is naive: “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”.

    You may be lucky enough to have a fairly recession-proof job, but this is highly dependent on the industry one works in and the job function. I work in marketing, which at many companies is considered a support function rather than a revenue-driving function and thus one of the first departments to be hit by cutbacks.

    Also, many public companies will do an automatic lay-off at the first sign of lower earnings. Flash back to 2001 – my husband was working for an established software company that did a 10% layoff because they did not make the Wall St. earnings estimate. They were still very profitable, mind you, they just came in a few cents below earnings/share estimates. He was laid off because he was one of the newest employees in the group, having been there for 11 months. 2 days later, I (and about 75% of the marketing department) was laid off from the start-up software company I was working for. I got a new job within a month. And I was laid off a year and a half later from that company, which had been in business for 25 years but had become highly dependent on the high tech sector and was hard-hit by the dot com crash. They ended up filing Chapter 11 and shutting down their entire East Coast office.

    So 6 years later we are doing what you mentioned – building up our emergency fund to prepare for possible layoffs due to recession. I just think that someone reading your rather sweeping statement might think “well I have always had great performance evaluations and my company is stable, so I’m not vulnerable.” Sure, anyone in their right minds is going to lay off their worst employees first, but if a manager gets an edict “you have to let 4 people go this week”, and you have 2 dud employees and are happy with the rest, the choices can get pretty subjective when it comes down to the next 2 to go.

  31. Trent, you said:
    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.

    I’m going to majorly disagree with you on this. “Stable companies” may primarily trim their deadwood but there are many companies that are not terribly stable, or that are normally stable but are particularly affected by some specific development in the economy.

    Also, many companies will trim based on seniority (in a union situation this is a given) or because the person retained can perform another job in addition to the one they’re currently doing.

    I lived through this in a previous recession. At that time I was a single parent with 2 preteens and a teen, receiving no child support. I had worked my way up from $12k per year to $26k and was living frugally but adequately with a while to go on my car loan and under $1,000 in credit card debt.

    My department (which was particularly affected by events in our industry) was cut in half, as were several others. I was the junior half (7 yrs seniority vs. 14). My department head remained but had to go back to doing what he’d done previously *in addition* to what he & I did (3 jobs for the price of one).

    I got a small golden handshake, 3 months of extended medical/dental (we were finishing orthodontics) and my annuity and pension money. When my unemployment ran out I spent about a year earning around $8/hr before getting into non-profits where I’m still employed more than a decade later.

    I managed to get through the recession, but it was very, very tough and I wouldn’t have lost a tooth if I hadn’t been without dental benefits for so long. If I’d had a mortgage at that time I probably would have lost my home. I eventually had to sell my car (for next to nothing) because the power steering pump went on it at the same time my insurance was up for renewal.

    So, please don’t tell me not to worry about a recession. I may be much better placed now (being debt free), but last time it took *me* a lot longer to recover than it took for the economy to do so. How many other people will suffer through that this time around?

  32. After 11 Sept the company I worked for (in NYC) laid people off based on salary – the highest paid were the first to go, and they were anything but “dead wood”. The company paid for this both in loss of experienced and well-connected staff as well as drastically reduced morale in the people left (including myself); the entire remainder of the staff turned over within a year or two.

  33. If your only making minimum wage, you are not trying very hard. People who can’t speak our language come to our country and make more than minimum wage.

    Considering the toil I put in at my job, I’d say I’m trying very hard. Where I work, slackers don’t last long. There’s no advancement path here, so there is no promotion to be had.

    I am overweight with bad teeth and bad credit (uninsured extended illness with loss of income) I can’t fix on a minimum wage income, so my prospects for a better job are minimal.

  34. To Minimum Wage

    Hello!

    I’ve seen many of your posts here a TSD and am curious to know which (if any) advice has helped you. It’s sounds like you’re in a tough spot and I thought if your listing the tips/advice that have helped you most would be interesting to hear. Sort of the best actions when things are really tough.

    Just an idea.

  35. Unemployment might rise some, but mostly it’s companies trimming fat – stable companies don’t fire good employees because of downturns.

    ??????????????????????????????????????????????????

    We disagree with your assessment 100% that healthy corporations do not get rid of good employees.

    Tell that to the thousands and thousands of North American EDS employees who have seen their jobs outsourced to foreign countries over the past five years.

    EDS has 20,000 employees in Argentina, through jobs created by EDS outsourcing of North American jobs.

    EDS has 950 employees in Argentina, through jobs created by EDS outsourcing of North American jobs.

    EDS has 1,200 employees in Hungary, through jobs created by EDS outsourcing of North American jobs.

    From the IT support center in INDIA, with hundreds and hundreds of North American jobs eliminated to provide work to India, to the newest IT support center in CHINA, which will employ 1,400 Chinese workers, the greed of major corporations is one of the components driving the recession.

    This link will provide further information regarding EDS’ much touted Best Shore Outsourcing.

    This is NOT about an unstable company cutting the fat. This is all about corporate greed and a lack of concern over the level and competence of customer service provided.

  36. I agree with those mentioning the last recession. I remember it quite well, and if you are in an area that is highly effected by it, job layoffs come in unexpected places, as the economic conditions spiral outward. However, I find your advice quite sound, and I wish that the media would not go for the sensational story every time, but put forth information that could actually help.

  37. [i]Considering the toil I put in at my job, I’d say I’m trying very hard. Where I work, slackers don’t last long. There’s no advancement path here, so there is no promotion to be had.

    I am overweight with bad teeth and bad credit (uninsured extended illness with loss of income) I can’t fix on a minimum wage income, so my prospects for a better job are minimal.[/i]

    And the longer you make excuses, the longer you’ll make minimum wage.

  38. Okayyyyy, kevin, let’s hear your solution. If employers don’t want to hire me, nobody’s gonna stop them.

    There are no excuses on my resume, so that can’t be why employers aren’t offering interviews.

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