Recession-proof your money to help you reduce the fear of a recession. Make sure you're prepared.
Do you want to make sure that you’ll be prepared if there’s a recession?
We discuss everything you need to know. By the end of this episode, you’ll know what determines if we’re in a recession, what factors might be driving us to a recession, and what to do to prepare so that you can, dare I say it, make lemonade out of the recession lemons.
One of the big ideas in recession-proofing your finances is understanding what we're talking about when we say we may be heading for a recession. To best prepare, you need to know the economic factors that are at play.
Second, understanding what you fear about a recession. Fears motivate us to fight, flight. But sometimes, we just freeze, full of anxiety. It's important to understand why you may have that reaction.
Lastly, we'll discuss practical tips. What are the opportunities out there now? How does your general financial plan help you recession-proof your finances? We discuss this both for people who are younger as well as people who are close to retirement or retired.
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
TRANSCRIPT
Bridget: Are you worried about a recession? And do you want to make sure you're prepared in case we do have a recession? In this episode, we're going to talk about everything you need to know to prepare for a recession. We'll talk about what is a recession and what you need to do to think through how to make lemonade out of these lemons. What actions can you personally take to make the best of this recession? Hi. I'm Bridgette Sullivan Mermel and I have a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking about how to prepare for a recession, I want to remind everybody to hit that subscribe button that helps other people find this show and helps us rise in ranking. So click subscribe and let's get into talking about recession. Bridget, I tell you, one of the things that I hear about or I think about and somebody will ask is “What the heck even is a recession?” You are afraid of it. It's kind of a scary thing, but I think it's worthwhile to talk about what are we actually talking about when we talk about a recession.
Bridget: Well, technically, when the news announces that we're having a recession, it means that the GDP or the gross domestic product has been down for two consecutive quarters. One of the reasons that people are talking about a recession is that the GDP was down in the last quarter. So in the first quarter of 2022 it was down. And now we're awaiting new numbers that will come out in July for the second quarter. So that's technically what a recession is.
John: If in the second quarter it ends up that the GDP is down again, then the announcement will come: we're in recession. Right?
Bridget: Right.
John: But it's interesting when you think about how the stock market hasn't been doing very well, the bond market hasn't been doing very well, inflation…there's a lot of these things. For a regular person it feels kind of recessiony, whatever that is. But yet there's a technical definition about what goes on. There's some sort of dichotomy, it seems, between those things.
Bridget: Well, and in the current circumstances, it's unique. And all of the different circumstances that contributed to every recession have been unique. But in our situation now, because of the pandemic, the GDP or what really we use to call a recession, like calling a foul, it usually kind of goes up to 3% and then down under…
John: A kind of linear wave.
Bridget: Yeah. And they try to keep it at 2 - 3%. That's what the people who have the controls of the economy, to the extent that they can control it, that's kind of where they try to keep it. Well, covid came and it was down almost 30 and then up almost 30. Okay. So those are big gyrations. Okay. And one of the things that is not emphasized when they talk about the GDP being down in the first quarter of 2022 is that, in the third and fourth quarter of 2021, it was up way more, like 6 to 7%.
John: Nobody cares when it's so far up, but then when it goes down a little bit!
Bridget: Yes! So we have more roller coaster effect with the GDP than usual. That's one of the reasons why if they say there's a recession, I might think, “Well, do I care?” And that's one of your biggest questions: do I care? And, what do I care about with recession? I think when people fear a recession, there are two things involved. Also, what's the definition? What are the levers? And then, what can you do about it? So let's talk about what you can do about it. Okay. The first tip is to think about what are you really afraid of? And that can be different depending on your stage of life. If you're a young person or just have a regular job chugging along, the biggest fear of recession might be losing your job.
John: Yeah, unemployment. Right. As you're describing that, I was thinking, “Oh, yeah, if you're a younger person, that's where I go.” However, if I'm an older person and I'm approaching retirement I may be thinking more along the lines of inflation or my stock portfolio. Can I make that thing work? Employment is still a big deal, but maybe a little bit of a different viewpoint depending on the stage that you're in.
Bridget: Right. You might still care about employment if you're retired just because you know a lot of young people, you want the economy to do it, and all that kind of stuff. But you don't actually feel the pain. If you're listening to the news, you might hear about a lot of pain and then you can decide how you feel about that.
John: Yeah, it's interesting in thinking about this, Bridget, is how we've had this high inflation and stock returns. For instance, my portfolios are down, inflation is up. Yet, we're not in a recession technically. I think this plays out if you look back in history. The stock market tends to be a leading indicator. One thinks, “I've got this bad stuff. I'm feeling bad about it. But, we're not actually in a recession yet.” And then if we wait to say, “Well, geez, if we are in a recession and I'm afraid of being into it, what do we do?” Well, by the time we start coming out of it, the market has probably already come back up, or at least a lot of times.
And so it gets into this dichotomy of “Here's what I'm afraid of…” It’s really interesting to talk through what people are afraid of, whether it's inflation or, “Oh, recession is bad! What do you mean? We should be afraid of it.” Think about what is it. I think it's really helpful to define what it is that we're feeling that anxiety about. And then let's transition to what do you do about those things? It's not, “Wait until we're out of recession” because, by that time, it's probably too late. But, we're not even in a recession and, yet, it feels kind of bad. So what sort of things do you have for people in this situation?
Bridget: There's one metaphor I want to use first. When I was going through puberty or other life stages, like physical life stages, you don't actually know that that's what happened until after the fact. You might have some hints, but there's other counterintuitive hints. That's kind of what a recession is. You get the diagnosis after you've gone through a lot of the pain. A lot of times, anyway.
John: Yeah, it's interesting.
Bridget: What you want to do about it really depends on where you are in your stage of life. If you are in this earning phase, you want to assess your job. You want to assess your source of income and say, “Okay, am I doing the fundamentals, which is saving 10% of my income? And what about my emergency fund?” Okay. You want to do an honest assessment of the realities of your job and if you're going to be able to keep your job or not. During a recession, say there's 10% unemployment. That would be very bad. But that says 90% of the people have jobs.
John: Yeah, right. Isn't that interesting?
Bridget: Yeah. And of that 90%, 70% probably are really not worried, don't have anything to worry about. And then 20% are maybe on the edges. So are you in that 70%? You work for a large institution that you just know there's nothing that's going to happen at this job. So you want to make sure you have adequate emergency funds in case you're out of a job. And you had a great indicator of how long is it going to take me to get a job?
John: Yeah. You know, it's interesting, and this goes back years and years. That friend who is in the head hunter or job placement would say that for every $10,000 a person makes, that's how many months it takes them to find a job after they've lost it. Right. So somebody's making $50,000 a year sort of expected it'll take about five months to get a job. Again, if you're making $100,000 a year, expect it to take about ten months. We've had clients and friends, and you've known people, and you go through and, golly, it's maybe not exactly that, but in that ballpark of things. People that are making $120,000 a year, it takes about a year typically, sometimes 6 months, sometimes 18.
And what's useful about that, I think, is that it gives you perspective. If somebody moves to Wisconsin and they don't know that winter comes and then winter comes, they go, “Oh my gosh, I can't believe it! It's cold.” Which is silly. You moved to Wisconsin. You go, you know what? It's going to be winter. It might last two months, might last four months, but we know what we're getting into. It makes it easier. I might not like the winter, perhaps. Some people certainly write, “Geez, cold. And I don't like it.” But it's not, “Oh my gosh, what do I do about this?”
In a similar thought process, “If I have to look for a new job, here's what it takes. And, I don't have to like it.” It's going to be anxiety ridden trying to figure it out, but it's also not as scary when you go, “Oh yeah, here's what the expectation is.” So setting expectations as you think about this, such as, is your job at risk? If it is, here's what it looks like. And that means that I need to have emergency funds and maybe even build up a little bit more. You can make some adjustments.
But I'll tell you, it's really interesting in having this discussion that it comes back to the basics in so many ways. It's not, “Well, now what do we do?” Rather, it’s that the things we've always done and maybe a little more attention, maybe a little bit more to this, and then just make sure that, you know, as time goes on, things float around. You can decide, “Let's make sure that our fundamentals are taken care of.” It's not this other different thing such as, “Well now we need to do this completely different thing.” It's the same things, but just pay more attention to them.
Bridget: Right, exactly. And back to the moving to Wisconsin analogy. It's like if somebody is moving to Wisconsin you say, “Okay, this is how long it might last, two to four months.” And you say, “Well, what can I do to prepare?” Buy a good winter coat or you might plan a vacation to somewhere warm in March. I recommend! 😊
John: But it's not, “How do I avoid winter?” No, that's not how this goes. It’s not avoiding a recession. We're going to have recessions. This is part of the deal.
Bridget: Yeah. And no matter where you live, there's going to be those kinds of weather, et cetera, incidents. Okay, so let's talk about what if you're retired.
John: Yeah. In that other demo, it comes back to the basics for me, I think. As you're approaching or into retirement, you want to have what we call the pantry. We want to have a bond ladder. We want to have guaranteed cash flow. And if you have that cash flow for five or seven or ten or fifteen years, a recession—and again, recessions typically last a fairly short amount of time, like winter in Wisconsin—it’s not a matter of “what do I do different?” Instead it’s “We've sort of prepared for this.” Maybe I do want to build the bond ladder a little bit farther out. Okay. You can think about those things, but it's just sort of sticking to the plan. And it's really having that plan in advance. Not changing your approach, but making sure that those things that you had thought of already are buckled up the way that you want them to be. So that's how I think about that.
Bridget: Also it can help you more accurately assess your risk tolerance. So if you are really afraid because you are living off your portfolio and Social Security or maybe a pension. Your anxiety is super high about this recession stuff so you might say, “Okay, I want to go back and look at how much risk I'm taking in my portfolio and reassess that.” But how you feel is only one of very many factors. But that's something to think about too. That's what I do with people. Let's reassess. How are we looking at this? That doesn't mean sell the stock markets down, sell everything and move into bonds. You’ve got to go somewhere. We like to have a good healthy mix.
But realize also with inflation, there are a lot of people with a lot of fear of inflation. Remember, Social Security is inflation protected. You get increases because of inflation. If you have a primary residence with a mortgage or without a mortgage, you have one of your biggest expenses locked in. So you have a lot of control over what you're spending and what inflation really affects.
John: It's interesting. Going back to the basics, you said one of my questions is always, “Well, why do I care?” Every recession, “Why do I care about that?” And it does sort of solidify that for me. Not that it's not important. But why do I care? My situation? What happens externally is way less important than internally. That’s how I handle it. And my stock portfolio maybe is more important than the technical definition of a recession. It’s what's happening to me and how I think about the actions that I take is way more important than if we're going to have a recession or not.
Bridget: Right. So it gets back to what I can control and what do I not control? I control how much savings I have, how much risk I'm taking in the stock market, how much I'm spending. But I don't control inflation. I don't control the stock market.
John: GDP.
Bridget: Exactly. I don't control national unemployment. So focusing on what you can control and trying to tune out some of the noise, I think, will make you a lot happier.
John: That's right.
Bridget: So great. Time to wrap up. I'm Bridget Sullivan Mermel, and I own a fee-only financial planning practice in Chicago. And this is John Scherer and he's got a practice in Middleton, Wisconsin. We are both proud members of ACP, or the Alliance of Comprehensive Planners. If you like how we're talking about this and you're looking for an advisor in your area—well, first of all, John and I both work with people all over the country, but if you're looking for somebody that you can meet face to face in you area—check out acplanners.org.
John: That's right. And don't forget to hit that subscribe button. And thanks for watching.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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