Even when our world emerges from the current crisis, it is almost a given that we will be rapidly entering a deep global recession. Unemployment is already spiking, and many others will find themselves out of work or in a precarious financial situation. For many of us, our retirement investments have fallen sharply in value already, and even further uncertainty is ahead.
Adding that type of economic uncertainty on top of the health crisis we’re all facing makes for an incredible challenge, one that we’re all facing. Yet, there are lessons that many of us learned from previous economic downturns that we can apply starting right now that can make a tremendous difference in our financial lives, no matter what might come.
There are three main areas of focus to consider going forward.
First, there’s less job certainty. Many people are already unemployed, and others will find themselves unemployed in the coming months. Along with that is the fact that even as things return to normal, many jobs won’t immediately reappear, as many smaller businesses (and even some bigger ones) go out of business or can’t hire right away. To put it simply, there are fewer jobs to go around during an economic downturn.
Second, the value of a lot of long-term savings plans, like retirement and college, have already fallen in value, and may decline even more. Many retirement and college savings plans have declined in value by 30% or more in just the last month, and more declines may be coming as economic changes rattle through the economy. Even if your job is secure, these changes may have a real impact on when and if you retire, and if you’re retired, these changes may nudge you to reconsider work in the future.
Third, these changes have a serious impact on mental health and personal relationships. Money troubles almost always increase individual stress, and higher levels of personal stress can cause a lot of challenges in the relationships in our lives, particularly with those closest to us.
Let’s look at each of these changes and what we can do now to prepare ourselves for further change.
A higher unemployment rate means making smarter choices about your job and your personal spending habits.
A good friend of mine once described having a job as being a lot like a game of musical chairs. When times are good, there are lots of chairs in the middle, so you can stumble along and still have a chair for you at the end of the round. When times are tough, there are fewer chairs in the middle, so you’d better be on the ball.
How do you make sure that there’s a chair for you, both now and in the future?
If you don’t have one, start establishing an emergency fund immediately. Yesterday, I wrote a detailed beginner’s guide to starting your own emergency fund, and for good reason. An emergency fund is one of the most essential tools you can have in an economic downturn, because the likelihood of career-related unexpected events is much higher and the financial impact of those events is so large.
An emergency fund is simply a pool of cash you have set aside strictly for emergencies, nothing more. You can start building it right away by signing up online for a savings account at a local bank or credit union and setting up a weekly automatic transfer from your primary checking account. You can also toss in extra money, particularly at the beginning, to get the balance up.
Having an emergency fund means that the immediate economic impact of a job loss will be significantly lessened. If you have a month’s worth of living expenses in that account, for example, then nothing cataclysmic will happen in your life for at least a month after a job loss. It gives you time to breathe and figure things out without panicking.
Cut back on your personal spending in smart ways. People often react negatively to the idea of cutting their spending because their mind always goes first to the spending that they care the most about, and the thought of cutting that spending seems miserable. However, that’s the opposite of how you should cut money. You should be looking to cut money on the things that you’re not thinking about, the forgettable things, the things that don’t make much of an impact on you.
One approach is to go through all of your regular bills and decide whether any of them can be cut completely or can have some of the items trimmed. (For example, cutting cable is easier than you might expect.) Also, look through your recent bank and credit card statements and identify which expenses you don’t even remember or just barely do – those are good targets for cutting going forward.
Try not to make radical changes to the parts of your life that you truly relish, or else you’ll find yourself resisting and rejecting other valuable changes you might make. Focus instead on the things that matter little and cut them hard.
Minimize your debt. The real challenge that debt offers to working people is that it’s another monthly bill, meaning the minimum amount of money you have to come up with each month is higher because of the presence of debt. If you have a credit card balance, you have another monthly bill. If you have a student loan, you have another monthly bill. If you want to relieve financial pressure on yourself and your family, one of the most effective ways to do it is to eliminate debts, which thus eliminates bills, which gives you more breathing room for every paycheck.
Start by paying off high interest debts — credit card debts and payday loans, particularly anything that has an interest level above 10%. Once they’re paid off, focus on smaller debts, as those can be paid off faster and thus free up financial breathing room.
Note that debt repayment really only works if you keep your spending below your income level. If you spend more than you earn, then you’re accruing debt somewhere, and it’s likely high interest credit card debt. Repaying debt is valuable, but it has to follow cuts in your personal spending.
Be a valuable asset to the organization you work for. The truth is that when cutbacks happen in a workplace, the people and positions that are trimmed are the ones that seem to have less contribution to the bottom line. The low hanging fruit is cut. Don’t be the low hanging fruit.
Be extremely reliable in your work. Be there on time, every day. If you’re asked to do something that isn’t completely unreasonable, do it efficiently and do it well. Over time, become a person that the team relies on to get things done. Do what you need to do to appear irreplaceable at work because people that seem replaceable are the first to be replaced.
If you’re out of work, consider what valuable things you bring to the table for your next employer and emphasize those. What do you have to offer that employers will value? That’s the question you should be asking yourself every single time when it comes to your work, and that’s what you want to lead with in every job application, every resume, and every interview.
Are you reliable? Do you have particular skills that some might find valuable? Do you have relevant experience? Do you have a flexible schedule?
Spend some time carefully considering what it is about you that would make you particularly good at certain types of jobs, and then lean into applying for those types of jobs and highlighting those things about you that make you right for those jobs.
This seems like common sense, and it is, but it’s a piece that so many people miss when it comes to applying for a new job. Ask yourself why the person on the other side of the table should hire you, and have a good answer ready. If you don’t have a good answer, look for jobs and hiring situations where you do have a good answer.
A decline in the value of your long term savings or a change in how much you can save means that you may need to readjust your long term goals.
Many of us have witnessed frightening and rapid declines in our retirement savings plans for ourselves and our college savings plans for our kids. This has definitely been true for me, and it’s led to a lot of conversations and thinking about how this will change our plans going forward.
Here are some strategies you should consider during times of uncertainty regarding your own savings goals.
Reassess when you think you can retire and adjust your contributions accordingly. For many of us, an abrupt downturn in the financial markets might change our outlook on when we might retire, and that can feel pretty worrying. It can even be tempting to make some significant changes to your investments.
A much better approach: if you’re feeling like your retirement plans or other plans have changed, make changes to how you contribute rather than how you’re invested. Don’t change your overall investment strategy, which should already assume that there will be economic downturns.
For example, if you wanted to retire in 10 years but feel it slipping back to 15, increase your retirement contributions so that the slide isn’t so dramatic. If you’re contributing to something other than a target retirement fund, have those additional contributions go to more aggressive investments, as they’ll have a longer period to sit and grow once the current downturn is over.
Your end date may change, but that doesn’t mean that your overall plan should.
Reassess other goals as well, such as saving for a down payment. Any time there’s a significant change in your own economic and employment situation, you should spend some time thinking about your own personal goals, large and small. You may decide that the time is no longer right to be saving for a house or for other savings goals because your own goals and plans have changed.
If you feel an economic downturn is imminent, is your job stable enough to support the transition to becoming a homeowner? It’s a tough question to swallow, but thinking about it now lets you make smarter decisions about what you’re doing going forward. You may decide to shift your timeline for home ownership and aim to save until the economy is recovering, which can change how much you’re putting away each month for a down payment, for example.
Don’t try to “time” the market. It can be very tempting to lean into the idea of “buy low, sell high” and take advantage of a stock market drop to move your investments more into stocks or buy far more stocks than you otherwise would. Resist that temptation.
The issue is that you don’t know — and, frankly, no one knows — where the actual bottom of the market is. The bottom may have already passed you by, or the bottom might not even be close yet. If you miss the bottom by very much, you’re not doing much better at all by trying to “time” things, and if you miss it widely, you’re probably doing worse than just investing regularly without looking at the market.
In general, unless this is your living and you know things extremely well, don’t try to time the market. Stick with your earlier plans.
If you’re already retired and relying in part on retirement savings, ratchet down your spending significantly for a while. In general, your retirement planning should have assumed that there would be some volatility in the stock market and your spending should be based on an annual withdrawal rate of around 3% or 4%, so the fluctuations in the market shouldn’t matter in that regard.
However, not everyone is following that kind of stable fluctuation-proof retirement strategy and a big downturn in value can be pretty scary.
Before you assume that you’re heading directly back to the workforce, give it some time to see how things rebound. In the shorter term, you should cut significantly into your spending so that you’re withdrawing less money from your retirement savings.
The stress of economic uncertainty means being more conscious of your relationships and your own mental and physical health.
When things become financially and professionally challenging, that injects stress into your life, and that stress makes itself apparent in a lot of unexpected ways. It can impact your relationships, it can impact your mental health, and it can even impact your physical health. Furthermore, those knock-on effects can come back around and actually make your economic concerns more severe.
Be aware of these connected effects. Here are some strategies for proactively dealing with them.
Be open and communicative with your loved ones about your economic worries. If you’re worried about your finances, don’t keep it bottled up inside. Sit down with your partner and talk about your concerns openly. Talk about how to solve those issues as a team, so that you’re not making decisions that work against each other (which can increase the stress).
Often, having a partner or a parent or an adult child that understands what’s going on with you can really help make things more manageable both in terms of practical finances and in terms of stress. They can make choices that can help reduce the financial stress of your situation while also being more supportive, and that can help you get through the situation, too.
Simply talking about things like this upfront defuses a lot of potential conflict down the road and helps your partner know how to help you.
Don’t make or promise big plans for the near future. Making big promises for the near future adds additional obligations to your plate, ones that can cause additional worry and stress during moments of economic uncertainty.
Don’t set goals for yourself that are highly dependent on economic stability for at least the next several months. If you set goals that rely on a strong steady income, having that goal ripped out of your hands creates additional pain. Rather, look at long term financial goals right now and focus on other areas of your life for short term goals.
In particular, don’t make promises to others that require lots of money or financial stability. Now is not the time to pledge a great vacation or some other amazing thing in a few months or even a year. You can think about such ideas but keep them close to the vest so that if they don’t come to fruition, you’re not disappointing someone, and you don’t feel the obligation to try to make a promise work when circumstances have changed.
If you have dependents, ramp up your emergency fund even more. If you have a partner that you’re financially dependent upon or, even more important, you have children or ailing parents or grandparents who are financially dependent upon you, you should really ratchet up that emergency fund, discussed earlier in this article. People who depend on you need it most during the challenging moments of life and having a really robust emergency fund will make all the difference.
If you don’t have an emergency fund yet, I strongly encourage you to go through this beginner’s guide to emergency funds and get one started for yourself.
Spend low-cost leisure time with the people you care most about. This is a good idea for all seasons, but it’s a particularly good idea during periods of economic uncertainty. Time spent with people you truly care about not only shores up those relationships, but it’s also a powerful mood lifter for you, making it easier for you to deal with uncertainties in all areas of life.
Keep the cost low, however. Rather than planning some expensive treat, just spend time doing something enjoyable with your key loved ones. Watch a movie together. Play a game together. When you’re doing those things, listen. Don’t retreat into your own thoughts. Don’t detach yourself by looking at your phone. Lean into that moment.
Take care of yourself. One of the most powerful assets you can have during an economic downturn is your own mental and physical health. You should do everything you can to shore up your health anyway, but it’s particularly important in the face of a downturn where you can less afford an illness.
Eat a healthy diet mostly made up of fruits and vegetables. Get some exercise. If you have vices like smoking, drinking, or drug use, cut them out. Get plenty of sleep.
You’ll feel far more mentally and physically together if you take care of these things, and that will make it easier to not only survive these times without illness, but make it easier for you to perform at your best.
This, too, shall pass.
When times are tough financially, it can feel like things will never get better. The truth is that this, too, shall pass. In 1918, the United States simultaneously dealt with a flu pandemic and a world war. Less than two years later? The United States began the “roaring 20s.”
Things can seem incredibly difficult right now, and it can feel like there’s no light at the end of the tunnel. Rest assured, there is. As long as human ingenuity and effort and care exist, there will always be a better tomorrow. Be ready for it.