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OMG, WE’RE HEADING FOR A RECESSION (allegedly)! I’M NOT YELLING, YOU’RE YELLING!!
I was in the middle of drafting another weekly post completely unrelated to this topic when I was informed by trending topics, news headlines, and people with large follow counts on social media that we are definitely probably on our way to our next inevitable recession that no one can accurately predict. Having survived The Great Recession of 2008, and its lesser talked about cousin The Dot Com Boom and Bust Recession of 2004, I am mildly experienced enough to share a few ways I plan to recession-proof my finances whenever or wherever the next recession may strike.
- PB77: Millennials Face the Scariest Financial Future Since the Great Depression ft. Michael Hobbes
- Financial Independence / Retire Early (FIRE)
The Next Recession Is Upon Us, Maybe
Just in case this is the first time you’re hearing about the next recession is on its way (my bad), the reason people are starting to talk about recession in greater volume is because of the Inverted Yield Curve. Don’t worry, I had no idea what an Inverted Yield Curve was or does either until roughly last week. Here is a great breakdown by finance expert Heidi N. Moore (@moorehn) that as an added bonus normal people can actually understand.
Whether you believe the inverted yield curve is a predictor or not should be completely irrelevant to your own personal finance. The more important takeaway is that even the pessimist’s predictions have given you a two year (730 calendar days) head start to self-correct your worse money habits. In a best case scenario, you’ll be better off financially even if a recession never hits. In the worst case, a recession does hit, but your recession-proof finances are prepared to weather the storm.
In full disclosure, my perception of recessions is distorted. After a six-week job search, I got a job promotion in the middle of the worst recession since the Great Depression. Conversely, in 2019, while the economy is booming and unemployment is lower than ever, it took me two years to land a lateral move. The Lord, the job market, or both work in mysterious ways!
For you, recession or no recession, this is not a time to panic. It is time to make smart money moves. Well within your control, here are the smart investment steps you can start to take today.
1. Improve Your Personal Finances While The Good is Still Good
There is a reason people get more MBAs during bad economic times. In fact, enrollment in some MBA programs is so anemic during our good economy that some business schools are actively rooting for the next recession.
Recessions, which are themselves corrections to bubbles, Irrational Exuberance, or other factors outside of our control are a natural occurrence. We have been so fortunate to be a part of one of the largest expansions in U.S. History (over a decade) that some began to argue recessions are a thing of the past. Revisionist will always argue recessions are a thing of the past right up until they are a thing of the present, again.
In reality, any time is a good time to make better financial decisions. It’s just that decision is made crystal clear when the ugliness of a recession is staring you down. Instead of waiting for the worst to hit, why not make those better decisions while the good times are still rolling in?
If you’re not sure where to begin, we’ve made it easy for you: PaychecksAndBalances.com/StartHere
2. Confirm Your Credit Card, Debt, and Student Loan Options
Regardless of whether a recession hits now or never, the majority of people will be reactive. When it comes to money management and personal finances, most individuals wait until their back is against the wall rather than the more sensical approach of slowly applying the brakes before a financial wall is forced upon you. There are two choices here, and I recommend you take the proactive approach for several reasons.
First, it’s easier to make rational decisions when you’re calm and collected. Secondly, you will be one of the few people calling right now. FYI – I called my lender for informational purposes only and they sounded surprised to hear from me to the point of being happy to talk (I think they were bored). Lastly, if things take a turn for the worst–and I hope for everyone’s sake that they do not–you will already be informed of all your available options while everyone else is scrambling to react.
Here are some specific steps you can take based on the type of debt(s) you have outstanding.
One of the most surprising things people fail to do when it comes to their credit cards is simply asking for a lower rate. It literally costs nothing to call your lender up (like right now, today, stop reading this sentence and go do it right now) and ask if a lower rate is available. Depending on the outstanding balance, this step alone can save tens, hundreds, or thousands of dollars a month. Yet, hardly anyone ever does it. Most people assume the rate they have is the rate they’re stuck with for the rest of their lives.
This is false.
It never hurts to ask. At worse, they’ll say no, and likely try to sell you on another product (at which point you should hang up). At best, you’ll walk away from a 5-minute phone call with a lower credit card rate. You have everything to gain and nothing to lose here.
If you’re not quite sure yet, or you want to lower your debt on your own and raise your credit score, we have a book, Debt Free or Die Trying: How I Buried Myself in $30,000 in Debt and a 4-step course to help you succeed with both.
- It’s Time to Raise That Credit Score! ft. Liz Weston
- Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future by Liz Weston
Admittedly, rate reductions are usually limited to prime customers. However, if you have a credit score of at least 740 or higher? Guess what, you’re likely eligible for at least a discussion and possibly a lower rate.
Similar to credit cards, people assume once they have a loan. That’s it. They’re stuck with that loan for the rest of their natural-born lives until they pay off the car loan, which in some cases, might be the exact same timeline. Again, this is not true.
If you are proactive, you have several options available. Whereas most people wait until they can’t make another payment or worse, they have already started missing payments, you want to contact your lender as soon as you think you might have problems making ends meet. Again, you want to be proactive, not reactive. Hopefully, you’re seeing a theme here.
Here are a few options to consider when it comes to your car loan(s):
- Early Pay Off – Obviously, if you’re already struggling to make payments this might not be a viable option. However, if you’re a few months away from paying that car off it might make more sense to accelerate payments than extend the loan out further.
- Refinance – When most people think to refinance, they think of going back to the dealership to buy another car (typically placing them deeper in debt). This is not your only option. You can also refinance with your original lender, a new lender, or local credit union. The latter typically offers some of the best rates and their business model is to be community-driven rather than shareholder-driven. Keep in mind that while refinancing might lower your monthly payment, it typically does so by extending the length of the loan. There is a tradeoff.
- Sale – Look, I know no one wants to think about selling their car. It’s your baby and/or you worked hard for it. I love my car more than my own first born child, which is easy because I am childless, but every time the monthly payment is due, I still think about pushing it off a cliff and filing an insurance claim. When finances are tight, sometimes the thing you hate to see go is the most obvious thing that needs to go.
- Trade-In – Last but not least, if your credit is good, a trade-in for a lower cost vehicle might be an option. Remember, similar to refinancing, the typical tradeoff here is that you will be underwater on your loan because most cars depreciate 30-percent when you drive off the lot. This means while your payment may lower in the short-term, you might owe more debt in the long-term.
- Refinance – Student Loans are somewhere between impossible to impossible to write-off, even in bankruptcy. Therefore if student loans are your budget killer, here is where you want to be the most proactive. Get on the phone with your lender to again ask if a lower APR is available (private loans), or start an informative (noncommittal) conversation with a refinance expert, like SoFi to best understand all your available options.
- Deferment – You can also ask to defer payments for hardship, if available. However, in almost all instances, your outstanding balance will continue to accrue interest while you are not making payments.
- Learn to Love Your Debt ft. Life & Debt Author, Leslie Tayne, Esq – PB100
- Good vs Bad Debt and How to Tell the Difference While Paying Off Both According to This Debt Relief Lawyer
- The Student Loan Doctor: “In just 2 years, the Student Loan Doctor LLC has helped thousands of borrowers, collectively, save over $4 million in student loan debt.”
The Nuclear Option: Your 401k
Admittedly, a part of me doesn’t even want to list this option because it is so horrible for your personal finances and your financial future. But, I understand emergencies happen so I would be remiss not to at least inform you of the best ways to approach this bad decision.
- 401k Loan – If you have a 401k, some albeit not all, allow you to borrow against your 401k. You’ll have to contact your lender for your available options, but this piece from Investopedia, When Paying Off Debt with Your 401(k) Makes Sense, featuring former guest and wealth manager, Kirk Chisolm (PB48: Renting vs. Buying with Kirk Chisholm), has the details you will want to consider before you make the call. Note: In most instances, if you lose your job where your 401k originates, the 401k loan must immediately be repaid in full or you will have to pay tax penalties.
- Hardship Withdrawal – In some cases, you may be able to withdrawal limited funds from your 401k due to “hardship.” Hardships might include medical bills, primary residence, eviction/foreclosure, tuition or student loans, and some limited home repair expenses. As you can probably imagine, it is not easy to qualify for a hardship withdrawal, therefore, this might be a discussion you should first have with a lawyer, CPA, Certified Financial Planner, or 401k expert.
- Nuclear Option: 401k Early Withdrawal – As the name implies, this should be your last and final option. There are no less than five things to keep in mind if this is your decision: 1) if you are still currently employed, early withdrawal might not even be an option (depending on your employer); 2) You are typically not entitled to any funds accrued from the employer match, if applicable; 3) You will have to pay a 10% early withdrawal (if under the age of 60); 4) You will have to pay taxes on all funds withdrawn; and 5) Our CFP estimates that for every $1,000 you withdraw in your 20s, you can cost yourself up to $20,000+ in lost compound interest and savings had you left the funds untouched until retirement age. This is a heavy price and penalty to pay; give serious consideration to speaking with a CPA or CFP before making this choice.
3. Make a Financial Plan for Your Cash (Or Start Saving Now)
When the stock market is up, unemployment is down, and credit is plentiful we collectively tell ourselves that 50-percent off really means we “saved” 50-percent on all that stuff we bought. The more accurate statement is we spent 50-percent when we could have saved 100-percent by buying nothing, but ain’t nobody trying to hear that when there are links to click and credit to be spent (I’m looking at you, Amazon).
During the good times, it is easier to believe if we can afford the minimum payment, we can afford the entire purchase. The list of lies we tell is limitless when life is good. It is only when we are confronted by a reality check in the form of a looming recession that we suddenly think twice about all those things we couldn’t afford to buy in the first place. In the real world, you can’t afford everything you can buy. But, here we are and here’s what you should do immediately. Full stop and pump your breaks, SKRRT SKRRT, on all that non-essential spending.
If you repeatedly find that you have more days available within the month than you have dollars available to spare in the month, here are some steps you can take to break the paycheck-to-paycheck lifestyle. Just 15 minutes invested in yourself and your personal finances today can change where your story goes in the next 15 years.
Start an Emergency Fund (or Spending Plan) – A budget, emergency fund, or spending plan doesn’t limit your money, it clearly shows you where your money should go based on your own personal goals. Get our free 15 Minute Money Plan delivered to your inbox, or try these great apps today.
- Digit – Struggling to save money? Sign-up for Digit at paybal.co/digit. Digit analyzes your spending and automatically saves the perfect amount every day, so you don’t have to think about it. Read why Rich loves Digit and how much it’s already saved him.
- Tiller – The only spreadsheet templates powered by an automatic feed of your finances directly into Google Sheets and Excel. Easily budget, track expenses, and get started here!
- Looking for even more ways to raise your paychecks and lower your balances? Visit PaychecksAndBalances.com/Tools.
This brings us to our final tip of the day.
Don’t Panic! Get Started!
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