Statistically, most families are not prepared for a personal recession. On this podcast episode, the Wiser Roundtable team discuss five ways to recession-proof your household. These steps include developing a household budget, eliminating debt, setting up an emergency savings fund, protecting your portfolio and updating your resume.
Is your household ready for a recession? In 2019, American families were living through one of the most prosperous times in our country’s history. A low 3.6% unemployment rate and the highest average household income in our country’s history gave many confidence that the financial high would last forever. The reality is that the sudden COVID19 crisis unemployed millions almost instantly, forcing the US Government to stabilize the economy by paying families directly and backing loans for small businesses. The story of the economic recovery of COVID19 has yet to be written, but if you were prepared before the crisis, your story will not be like so many of the now 14% unemployed.
Statistically, most families are not prepared for a personal recession. You don’t have to have a country-wide recession to be hurting financially; even in a humming economy, businesses can fail, and industries can suffer. In a 2019 Charles Schwab Modern Wealth Survey, 59% of respondents were living paycheck to paycheck, 44% were carrying monthly credit card balances and only 25% had emergency savings. Living your financial life this way is like taking off in a plane to a destination with bad weather, but not taking any extra fuel to land somewhere else if needed. It is very risky.
Planning for personal financial deviations lowers anxiety, helps to reduce marital issues and allows you to help others in their time of need. Here are our steps to glide through your next crisis. If you are in a current crisis see our crisis survival guide blog.
Create a household budget; know what you can cut out quickly
There are some bills that you have to pay like your mortgage, car note, student loans, credit card minimums and utilities. After that, most of what you have to pay is discretionary. Create a budget that covers the essentials plus food, gas and other items that you deem necessary. Draw a line, and then add the other items that work in your budget now, but could be dropped off in times of crisis.
Imagine that you got paid on a Friday and the only required payments were your mortgage and utilities. No car note, credit card bill, student loan or any other payment. Imagine what that free cash flow could do for you! All these debt items cost you thousands in interest every year. A credit card balance of $5,000 charging 18% in interest would cost you an additional $2,348 in interest if you only make the minimum payments. Anything you purchased cost you 18% more. You are making your financial institutions wealthy instead of building wealth for yourself, plus these items are above the line in our crisis budget. This means that if you can make these payments go away, your crisis budget gets smaller.
There are two popular ways to eliminate debt. One method is to create an avalanche payoff plan. List out your debts, except for your mortgage, by highest interest rate to lowest interest rate. As in example 1 below, your minimum payment for all debts is $1,129, but you can afford to pay $2,000 toward debt a month. You would apply all extra money for debt to credit card 1. In this example our debt payment budget of $2,000 – the minimum payments of $1,129 gives us $871 extra to apply to credit card 1. Once it is paid off, you take the $871 extra plus the $204 that you were paying on credit card 1, and apply the new total of $1,075 extra to credit card 2. You keep repeating until your debts are eliminated.
18% $9,400 Credit Card 1 Min Payment $204
9.9% $4,300 Credit Card 2 Min Payment $125
5.5% $15,100 Car Min Payment $550
3.5% $25,000 Student Loan $250
Sometimes it may be better to do the snowball method where you order your debts in order of the smallest balance instead of the highest interest rate. The idea is that you get more motivated by getting some quick wins early in the process. You apply the extra to the debt payments just as you did in example 1.
$4,300 9.9% Credit Card 2 Min Payment $125
$9,400 18% Credit Card 1 Min Payment $204
$15,100 5.5% Car Min Payment $550
$25,000 3.5% Student Loan $250
Debt can limit your life choices, prevent you from saving for retirement, and greatly increase your required cash outflow. In the good times, eliminate debt. You may even need to temporarily deploy your crisis budget to accelerate the payoff of debt. If it keeps being a problem, stop using credit cards all together and look at signing up for a Dave Ramsey Financial Peace course where you can meet others that are on the same mission of eliminating debt.
Build Emergency Savings
In times of crisis, cash is king. How much cash you will need depends on your expenses. A good start is using your monthly crisis budget and multiplying it times 6. This will give you six months of no job income. In good times try to add to this in order to pay cash for life events, like a roof, HVAC, car repairs etc. At a minimum though, the balance should stay above the six months of crisis income mark.
Keep your emergency savings in an FDIC insured account or CD. Your emergency savings should not be invested in a product that could potentially fall in value when you need it the most. Online banks are offering better savings rates than traditional brick and mortar financial institutions. Do a quick Google search and you can find some reasonable rates.
Protect your portfolio
Think of your retirement portfolio as your castle on a hill. You want to protect your investment for your future self, so selling portfolio assets to pay bills is a great way to tear down your future kingdom. Your castle has two moats. The first includes your cash, checking, and savings. The second moat is your emergency savings. Cashing in a retirement account before 59 ½ can be costly. You could be taxed at your regular State and Federal rate plus a 10% early withdrawal penalty. For many this could add up to be 41% of the gross withdrawal amount. It’s better to think of your retirement funds as off limits. Should things get really bad, your retirement accounts are protected in bankruptcy.
The best way to have a portfolio protected is through financial planning. Understanding your risk tolerance, building a diversified portfolio, keeping costs low and focusing the portfolio on the long-term are all a part of investment success. A fiduciary, fee-only advisor can help you build out this plan to be ready for your next crisis.
Keep your resume updated
Job changes can happen quickly. Having your resume ready to hand out will reduce your anxiety and help you understand the best direction for your career. This process can be painful at first, but if you look over your resume a few times a year, it gets easier to update. Google “free resume builder,” and you will find endless options to assist you.
Recession proofing your household may be a journey for some. For others it may just be a simple reorganizing of finances. Dave Ramsey, the author of Financial Peace and host of the Dave Ramsey Show, has a saying, “live like nobody else today, so you can live like nobody else tomorrow.” You may not see your friends recession proofing their households, but it is certainly something that the masses should be doing.
If you need help starting your journey to financial peace, Wiser Wealth Management is ready, willing and able to guide you.
Wiser Wealth Management, Inc (“Wiser Wealth”) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). As a registered investment advisor, Wiser Wealth and its employees are subject to various rules, filings, and requirements. You can visit the SEC’s website here to obtain further information on our firm or investment advisor’s registration.
Wiser Wealth’s website provides general information regarding our business along with access to additional investment related information, various financial calculators, and external / third party links. Material presented on this website is believed to be from reliable sources and is meant for informational purposes only. Wiser Wealth does not endorse or accept responsibility for the content of any third-party website and is not affiliated with any third-party website or social media page. Wiser Wealth does not expressly or implicitly adopt or endorse any of the expressions, opinions or content posted by third party websites or on social media pages. While Wiser Wealth uses reasonable efforts to obtain information from sources it believes to be reliable, we make no representation that the information or opinions contained in our publications are accurate, reliable, or complete.
To the extent that you utilize any financial calculators or links in our website, you acknowledge and understand that the information provided to you should not be construed as personal investment advice from Wiser Wealth or any of its investment professionals. Advice provided by Wiser Wealth is given only within the context of our contractual agreement with the client. Wiser Wealth does not offer legal, accounting or tax advice. Consult your own attorney, accountant, and other professionals for these services.
Sign up for our newsletter!
Our latest blogs, podcasts, and educational videos delivered to your inbox weekly.