Are you noticing more frequent chatter from friends, colleagues, and the media about an imminent recession? Is this causing your own anxiety level to increase?
Let's start with what is an absolute certainty. A recession IS coming. It's built into capitalism as part of the business cycle. In fact, a recession may have already started and technically speaking we won't know for sure until we're 6 months into it. So, if we can't predict when it will start, how long it will last, or how bad it will get, how can we do anything to prepare ourselves for it?
What can I do to "recession proof" myself and my finances?
A reality of personal finance (and life, really) is there are many things we have no control over. To name a few of the obvious ones:
- Stock market performance
- Interest rates
- The housing market, specifically the one you're living in
- Tax rates
So.....Focus on what you can control
Ok, now for the better news. The list of things you do have control over and which can make your financial house more resilient to the coming recession storm is also somewhat lengthy:
Conduct a financial 'fire drill': There are good reasons that schools and workplaces conduct drills for fire, inclement weather, and lockdown scenarios. If the unfortunate actually happens, hopefully the training results in an appropriate and orderly response (i.e nobody panics). Why not do the same with your finances under a scenario that could really disrupt things during a recession?
Job loss: Even if you are perfectly content in your current career path, it’s a good exercise to act as if you are about to be laid off and figure out your next move. Maybe switch your LinkedIn status to "open to new opportunities" and provide some input on your career interests. If these preliminary steps lead to some genuine interest from recruiters or the employers themselves, maybe sit through an exploratory interview. Of course don’t waste their time if you are sure it's not a role or company that could potentially be a fit. The point here is to practice the process before it's real, get a pulse for your market value, and learn what companies are looking for and what opportunities might be on the horizon. A few other questions to ask yourself?
- Is your resume current? Are you investing time in building your professional network? Has it been awhile since you gave your LinkedIn profile page a refresh?
- Do you have a list of contacts that have the potential to assist in finding replacement employment for you (i.e. Centers of Influence), both at your current employer as well as other companies where your job skills could be a good fit?
- Have you contacted or developed a relationship with any recruiters that work in your industry?
Developing Your Skills: After the "I just got laid off" dress rehearsal is over, put your attention back to the here and now. If you are early to mid career (30's & 40's), your greatest asset by far is your earning potential over the next few decades. Take a look at people in larger roles that you hope to grow into someday and observe their inventory of skills and strengths relative to your own. Ask a trusted colleague or mentor for feedback. Seek out projects or opportunities to get out of your comfort zone and get more exposure to some of those Centers of Influence discussed above. Signup for training that would make your resume more marketable. Long gone are the days where you have to physically sit in the classroom at the scheduled lecture time. You can learn that new coding language online and in between your busy schedule.
The actions immediately above are intended to reduce the likelihood of unemployment and/or reduce the amount of time it would take you to find a new job if you were laid off. The following actions are intended to assess and improve upon your ability to withstand a prolonged period of unemployment.
Budget Review: Setting up and regularly reviewing a budget is an important habit of wealth accumulation, but here I want you to look at your budget under the stressed scenario of a job loss in the household. Whether you are a 1-income or dual income household, the exercise is to assume one job goes away. First determine how much of your current budget could be reduced (less eating out, lower the vacation budget, etc) and how many months your emergency fund cover at this new expense level. Going through this exercise will inform on both where you can cut back if you really need to and also what the size of your emergency fund should be.
Increase Your Emergency fund: Speaking of the emergency fund, you should always have at least 3-6 months of living expenses stashed away in a safe location like a high-yield savings account but if you have reason to believe that dark clouds are forming or your budget fire drill suggests it should be higher, take the opportunity now to reduce your expenses or take some money out of the market and build up the rainy day fund to a more comfortable level. There's an opportunity cost of keeping more cash, but you don't have to hold to this policy forever and if it allows you to sleep better at night until the dark clouds fade away, that alone makes it a worthwhile choice.
Review Your Insurance Portfolio: Ideally, you should be reviewing your coverages across auto, renters/homeowners, life, disability, and umbrella annually to confirm that your coverages still meet your needs and to check for better prices. Since we're focused on a recession that has the potential to take away your current job, I would focus on the types of insurance that are typically tied to your employer benefits: life and disability.
Term Life Insurance: For most families, the group term insurance that your employer gives you for free (typically 1-2x base salary) is not nearly enough. Many people opt to also purchase supplemental term life through their employer benefits. There are two big reasons why I would recommend an independent policy over the supplemental coverage available at work.
1) Portability: Since the independent policy is not tied to your employer, when the recession comes and you get laid off, you don't have a lapse in life insurance during the timespan between leaving the old job and starting the new one.
2) Level pricing: The group rates typically will not stay constant over time. The pricing is set by age ranges (i.e. 35 to 39 year, 40 to 44, etc), so even if nothing changes with the rates that your employer negotiates with the insurer, your rates will go up over time as you move from one age range to the next. The independent policy can be purchased as 'level term' for a period as long as 30 years. In a world where most costs increase due to an evil force called inflation, this can be one line item that is constant for decades.
Thanks to sites like SelectQuote.com, getting quotes for a term life policy is very easy and takes little time.
Disability insurance: Same as with life insurance, your employer gives you disability coverage for free (typically 50% of base pay) and you have have the option to "buy up" with supplemental coverage (usually up to 65-70%). Getting 70% of your salary might feel like adequate coverage, right?
Here are a few reasons why this setup might not be as rock solid as it seems:
1) Base Pay vs Total Compensation: If a sizable portion of your total compensation comes by way of bonus or equity (RSU/ISO/options), these variable components are likely not included in the benefits calculation. If half of your comp is equity, that 70% benefit is really 35%.
2) Monthly Cap in Benefits: Many disability policies have a cap on monthly benefits. If you are highly compensated, the cap could result in a benefit that is a much lower % than you thought you were signed up for.
3) Those da*n taxes: If the employer is paying the premiums or your contributions are with pre-tax dollars, the payout is taxable income. So much for insurance being tax free.
While there are sites like policygenius.com that will quote disability policies, there are a lot more decisions to make on disability coverage relative to term life insurance (benefit period, occupational definitions, flat benefit or future income increase option, etc). Speaking with a fee-only financial planner might save you a significant amount of research time in finding the right supplemental disability policy for your needs.
Review Your Portfolio's Asset Allocation
10 years of consistent market growth can make even the most diligent investor become complacent. What might have started with an asset allocation that aligned with your risk tolerance and goals could easily have become a much heavier tilt toward stocks and even a specific sector like technology. Now could be a good time to rebalance back to an appropriate split. Even better would be marking a date on the calendar to make rebalancing an annual ritual like Easter egg hunts and Turkey Trots.
Company stock: Underneath the broader asset allocation review, you should take a look at the % of your nest egg that is held in your employer's stock. For a more in depth discussion on this topic, check out a prior blog post HERE. For today's purposes, if you are holding a large chunk of your company's shares, imagine what that share price might look like in the recession scenario where your company is laying you off (yikes!). Provided you aren't in a trading blackout window, consider selling a portion (or all) of the company stock and deploying the proceeds into diversified holdings. If the shares are in a taxable account, it's always a good idea to consult with your tax professional to understand the impact of any large transactions before pulling the trigger.
This is a pretty big list of things to take care of. But thankfully they’re pretty much all part of a comprehensive financial planning process, whether you work with a financial planner or DIY. Even if a broader recession doesn’t happen, your own personal recession could.
So, don’t stress over the timing or severity of the eventual recession. Instead, start checking off the list of the things above to make yourself as “recession-proof” as possible.
Does a “recession protection” checklist sound good to you? But you need some help figuring out the specifics to put on your checklist? Contact me ron@rivermarkwealth or schedule a complimentary consultation.