We have a lot of younger folks on this page. Our last recession was 2008. I’m 33 years old and I graduated college in 2008, during our last recession — most millennials have never experienced one as an adult. We are overdue for one, and there are some warning signs that this one might hit soon and hit hard.
Ideally, you want your finances to withstand a recession much like would you prepare your home to withstand a major storm or hurricane. Layoffs are more likely to occur during a recession, and finding a new job will not be easy. Banks are less likely to lend, and the value of your investments and home might plummet.
So, what can you do to prepare?
- Pay down high interest debt. When a hurricane is coming, you want to remove things that might threaten your house, like dead tree limbs. Likewise, high interest debt, like credit cards, threaten your financial well-being. It’s time to remove these threats, quickly and efficiently. If not, they might bring down your roof.
- Build an emergency fund – the food and water that will support you through the storm. You might need to sustain yourself for some time.
- Things will look different – don’t panic. When you step outside in the eye of the storm, you might notice things look different; they look scary. Your home is underwater. Your 401K has lost 40% of its value. Breathe. The worst thing you can do is to panic and sell your investments. They will rebound. It will take time. Do not sell low and buy high.
- Protect your foundation. If you are nearing a major financial milestone, like buying a home, or retiring, prepare now by rebalancing your portfolio. Equities will lose money during a recession. If you will not need to access the funds soon, re-read step three. If you are nearing a major milestone, and will need to access the funds soon, it is time to re-balance. If your time horizon is 0-3 years, cash is king.
Edited to add:
A few people asked for sources –
82% of CFOs polled expect recession within 2 years – www.bloomberg.com/news/articles/2018-12-12/u-s-cfos-overwhelmingly-expect-a-recession-within-two-years
Two-thirds of Economists expect recession by end of 2020 – www.bloomberg.com/news/articles/2018-10-01/two-thirds-of-u-s-business-economists-see-recession-by-end-2020
Also – I am not an economist, but the warning signs that I have read about – 1. major economic slowdown in China, 2. companies are highly leveraged. Why it could be a tough one – with rates as low as they are, the Fed doesn’t have as much leeway to encourage spending.
Second edit to clarify the “most millennials.” – Definitions vary, but I see those born between 1980-2000 as millennials. That would put the age range of people in that generation from 8-28 years old in 2008. In other words, roughly half were between 8-18. Some of you, like me, were a bit older. However, a decent portion of those 18-22 were in college in 2008 and somewhat sheltered from the recession. Obviously, those on the older end of the generation might have different experiences. But to be fair, those born between 1980-87 or so do not make up “most millennials.” I’m an older millennial (born in ’85), and I graduated college in 2008, as mentioned above. It was tough to find a job for a while, and I had to work retail to make ends meet. I also didn’t have many assets or liabilities, and could get by at $10/hour. Flash forward 11 years, and I have been in my current career for 8 years. I have eight years of 401K contributions. I own a house. My monthly debts are more than my monthly income was in 2008. I am in a different stage of my financial life, and a recession would hit me differently than it did in 2008.