Over the last few weeks, I’ve come across a number of articles predicting an upcoming recession: The Winter Is Coming: A Case For A Recession from SeekingAlpha, Is a Recession Coming? from Forbes, and There’s more than 60% chance of a global recession within the next 18 months, economist says from CNBC, among others, are all in agreement that a recession is coming.
But what does that mean for most of us? Here’s what being in a recession means for the average American.
There’s a higher risk of job loss. During a recession, companies and organizations often cut back due to slowing revenue growth or even revenue shrinkage. They’re not making as much money, and one way to continue to make ends meet and make their stocks still look good is to cut employees.
It’s harder to find a job. Unsurprisingly, companies don’t hire as much in a recession, meaning it’s harder to find a job, and the jobs you do find often don’t pay as well on average.
The value of investments in the stock market will drop, as will the value of your home (most likely) – and other markets may drop, too. The stock market usually begins to downturn once signs of a recession become evident, which can have an adverse effect on retirement savings and other investment goals. Other markets may also enter a decline – recessions often have a negative effect on housing prices, for example. Some markets tend to go up during a recession, but they’re less predictable.
These changes alter life patterns and cause family stress. A job loss or an inability to find work or a sudden drop in retirement savings can rapidly change family dynamics. There’s suddenly more money stress on the table, and things like vacations and other enjoyable major expenses suddenly become a lot more risky.
None of these outcomes are pleasant ones, but they’re the economic reality of all Americans during an economic downturn. That’s the new financial landscape.
The question is, how does the average American deal with those changes? More importantly, as we sit here with months or perhaps even years to go before a recession sets in, how can the average American prepare for those changes?
Here are some simple strategies for getting you and your family ready for all of these scenarios.
Preparing for Increased Risk of Job Loss
One of the biggest risks to come with a worsening economy is an increased risk of job loss. Think about it in simplest terms: if the unemployment rate is rising, that means that people who were once employed are becoming unemployed, which means that there’s a rise in people who once had a job who no longer do so.
Being laid off or fired doesn’t just happen to “bad” employees. It can happen in any organization where a decision has been made to downsize a department or “reorganize” in order to remove positions.
Here are five things you can do to prepare for this.
Make sure you’re meeting your performance standards. Most workplaces offer some form of regular performance review. Take that review to heart. Take a look at your most recent performance reviews and see how you’re doing with regards to the standards being presented there. Are you meeting or exceeding them? Are you documenting how you’re meeting or exceeding your goals?
Since an economic downturn is still on the horizon, it’s worthwhile to start keeping track of things now by using your performance standards as a guide and documenting your efforts as you’ll likely have additional performance reviews between now and when job loss might become a serious risk.
Build up a strong emergency fund. Having a few months of living expenses sitting in your savings account makes the stress of job loss much easier to handle. You don’t need to have a new job the next day to avoid a personal crisis – instead, you do have a little bit of time to find a new job while you live off of your savings.
The best way to start (if you haven’t already) is to instruct your bank to start transferring money regularly from your checking to your savings automatically. If your bank doesn’t allow such an automatic transfer, open up an online savings account at a bank like Ally or CapitalOne 360 and set up that transfer yourself. You’ll be glad you did.
Work on building a strong reputation of positivity and trustworthiness. Positivity and trustworthiness are two traits that tend to improve a person’s value in the workplace. People who don’t cut each other down are great to have around because of the positive value they bring to office culture; they keep people out of management’s hair. People who are trustworthy tend to deliver when they make promises and tend to have the respect of those around them.
Combine those two traits and you have a valuable employee, one that makes consistent positive contributions to the workplace and one who other employees will vouch for.
Become a key part of important, high-profile projects. When there’s a major project going on at work, get involved with it if at all possible. Become a part of that team and bring your traits of positivity and trustworthiness to the project. Make real contributions along the way.
While this might be somewhat stressful in the short term, what it does for you is demonstrates that you can handle high-impact situations productively, which is what most employers are looking for in their employees. An employee who steps up to a difficult challenge and manages to be a useful member of the team is one that they’re not going to want to cut loose unless they have to.
Make your boss’s priorities into your priorities. A final strategy that works well at almost any job is to step back and look at your job through the eyes of your boss. What does your boss want to get out of your position? What does your boss care about the most?
Then, do your job in such a way that it provides maximum value to your boss. You want to make sure that your performance ensures that the boss reaches his or her objectives with a minimal amount of fuss from you. Bosses (usually) notice when things are done well and they don’t have to worry about them at all, and that type of notice will make you golden.
Preparing for a Tougher Job Market
What if you’re going to be seeking a new job? How do you prepare for a job market that’s about to become significantly more difficult? Here are five things you can do to prepare yourself for a time when it might be harder to find a new job.
Focus on resume-worthy uses of your time and energy. Ask yourself whether you’re using your time and energy on things that can bolster your resume or not. Are you taking on tasks at your current job that can be added to your resume? If not, make an effort to prioritize them. If you’re not currently employed, or not working in the field you want to be working in, what are you doing every single day to add something of note to your resume?
Take classes. Get involved with projects that use your skills. Get involved with resume-worthy community projects. You need things that will help you stand out from other candidates. Make sure you’re spending at least part of each day doing just that.
Build up your network of strong professional contacts. Quite often, jobs are obtained because you have your foot in the door in a positive way with someone already in the organization. Get your foot in the door by building and reinforcing a network of professional contacts.
How do you do this? One of the most powerful ways is to attend professional meetings in your area. See if there are any meetings of professional organizations in your area and start attending and get involved. Similarly, check out Meetup.com and see if there’s anything relevant in your area.
Of course, there’s also the internet…
Make yourself known in the online community of your profession. Many people build out their professional network by getting involved in social media in their field. They use Twitter, LinkedIn, Facebook, and even things like Instagram to get to know people in their field better and engage in conversation. Many people start a blog that allows them to share knowledge with the world under their own name, associating that knowledge with them and further bolstering their reputation.
Use social media to seek out online communities for your field. Keep looking until you find interesting and relevant conversations, then join in consistently. Use those conversations to make yourself better, but also use it as an opportunity to share your knowledge with others. Every person that you help is another step toward having a healthy online presence with a lot of connections, and those connections can prove invaluable when you need to change positions.
Get education and certification that’s valuable in your field. Take a look around your field and see what certifications and education are expected from someone with your experience level who might be looking to move up or even to move sideways, then make it your priority to obtain those certifications and that education.
One great place to look is at the job listings for the positions you’d like to have. What skills and certifications and education are being asked for over and over again? Those are things that you, too, should have. Make sure you’re checking as many boxes as possible on other job listings.
Take on leadership opportunities in your current position. Look for any and all opportunities in your life and in your current job to step up to the plate and take on leadership positions. Leadership demonstrates a willingness to take on responsibility for larger tasks and to handle their organization, both of which are appealing to most organizations hiring anyone above a pure entry-level position.
If there’s an opportunity at work to help lead a project or a group, stand up. If there’s an opportunity at church to be a leader, stand up. If there’s an opportunity in a community group to be a leader, stand up. You’ll be glad you did.
Preparing for a Drop in the Value of Investments
Another big factor in an economic downturn is the reduction in value of investments. Most recessions start off with a big hit to the stock market, and many other markets – real estate, bonds, and other things – can also go through some awkward stages as well. Here are five things you can do to prepare your finances for an economic downturn.
Reassess your financial plans regularly, independent of market changes. Sit down and really consider why you’re investing and what your goals are, particularly regarding the timeline. Are you investing for retirement? How far off is retirement? Are you investing for a house? How far off is that house purchase?
The thing to remember is that the further off your goal is, the more risk you can tolerate regarding that goal. For example, if your goal is only a year away, you probably shouldn’t be investing in the stock market to achieve that goal, and you should be pulling money out of the stock market if you can’t handle any volatility between then and now. On the other hand, if your goal is twenty years away, sitting on an aggressive stock market investment makes sense.
Don’t try to “time” the market. Many people get swept up in the idea of “buying low and selling high” and try to “time” the market by guessing when it will peak and when it will hit bottom.
The problem is that when you do this, you almost always miss the peak and miss the bottom, which eats up an awful lot of what you might gain from market timing. Add in the fact that you miss out on dividends along the way, are paying transaction fees and taxes, and so on, and it’s generally not worth it to try to time the market. Instead, let your investments ride and only make changes if there are non-timing reasons to do so.
If you’re investing for retirement, strongly consider having your money in a target retirement fund. The advantage of simply having your money in a target-date retirement fund is that it automatically handles investment shifts you might want to make as you approach retirement and want to dial down the risk a little. Most target retirement funds gradually start moving into bonds and cash as retirement comes closer, which naturally mitigates the risk of a stock market downturn.
See if your retirement plans offer a target-date retirement fund and strongly consider simply putting all of your money into that fund. It might not be perfect, but it’s a pretty efficient solution for someone who doesn’t want to study investments deeply.
If you intend to start withdrawing in the near future (less than 10 years), make low-risk additional contributions. Some investments, such as retirement investments, involve making withdrawals slowly over a long period. That means you want to have some of your investment in a long-term investment (like stocks or real estate) and some in a short-term investment (like bonds or cash).
As you’re contributing money toward that big goal, it makes a lot of sense to gradually move your contributions from the long-term investments to the short-term investments. That way, when you start taking out money, you have a mix of short-term and long-term investments because you’re going to want some of the money in the short term (the first ten years of retirement or so) and some in the long term (everything after that). You want a balance.
If you don’t intend to touch anything for more than ten years, leave things alone. It can be very tempting to move money into a safer investment when you’re looking at a potential real estate or stock market downturn, but if you don’t intend to touch a particular investment – or part of that investment – for 10 or more years, leave it alone and let it ride out the storm.
Remember, market ups and downs are a normal part of investing. You shouldn’t make moves based on those normal fluctuations, and recessions and stock market dips are completely normal.
Preparing for an Increase in Family Stress
Financial changes, particularly unexpected ones, can put a real burden on your family. It can cause all kinds of stress, and money stress can be extremely damaging to marital and family bonds.
You can take action right now to head off the negative effects of those burdens. Here are five things you can do to prepare for a potential increase in family stress down the road.
Communicate clearly with everyone involved so that there aren’t any negative “surprises.” If you see a potential difficulty coming, communicate. Be clear with your family what may happen and what the consequences are.
While that may be a difficult conversation, putting it out on the table and discussing what the ramifications are eliminates the surprise. It helps everyone to prepare in their own way for that potential change, and it encourages everyone to work together to minimize the impact of that change.
Find inexpensive ways to bond as a family. The best way to survive a family crisis is to have strong family bonds in place that help your relationships survive a stressful period, and you can start building those bonds now.
All you have to do is make a sustained commitment to spending quality time together as a family. Turn off your devices, get off the couch, and go do something together. Plan weekend hikes. Go to local community events. Play a game. Even things like working on homework together can make a big difference.
Don’t promise expensive plans in the future. If you’re making expensive plans for the future, like a trip to Disney World next summer, minimize the talk of that trip until you’re incredibly sure that the plan is in place. The hotel is booked and paid for, the tickets are bought, the transportation is paid for – that’s when you start talking about it.
Before then, you run the risk of setting up false expectations that you can’t live up to, and when you fail to come through on your pledges and promises, you begin to dissolve trust. Avoid doing that, particularly when heading into a period of uncertainty.
Instead, plan and promise a lower-cost vacation and lower-cost upgrades. A much better approach is to plan for a leaner future in the short term while bolstering your family’s financial security. Instead of promising a trip to Paris next summer, plan a camping trip to Yellowstone. If you decide at that time that you can afford to “upgrade” the vacation, stay a little longer or add on an extra leg at the last minute.
With the money you’re saving from more realistic plans and expectations, you can prepare yourself financially for what may come by paying down debts and building up an emergency fund.
If you have children, make an even larger emergency fund than you would as a single person or as a couple without children. My general advice on emergency fund size is to shoot for a month’s worth of living expenses, then add to that an additional month’s worth of living expenses for each person living under your roof.
So, for example, if you’re single, two months of living expenses is completely appropriate, while a family of five may want to shoot for six months.
Why do this? The more dependents you have, the more likely it is that something will seriously go wrong. It’s also more likely that a job loss will cause a severe crisis that will affect lots of lives, not just one or two. Prepare accordingly, and have a big emergency fund.
A financial downturn isn’t something to be scared of. It doesn’t need to keep you up at night with worry. However, it is something that’s worth preparing for, at least a little. Preparation makes it easier to survive a downturn with few scars, and you can get started now with very easy steps.