Are We Headed For A Recession? Prepare Your Finances Today!

Are we headed for a recession? Predictions are flying, pundits are having a field day. But is it something you should be worried about?

This week we break down some facts about recessions and what you can do to prepare if you are worried or feel like you might be vulnerable.

Recessions are a natural part of the economic cycle, occurring roughly every 5 to 10 years, and are often influenced by factors like hiring and employment. While a recession can bring fear and uncertainty, one of the best ways to prepare is by building up an emergency fund, saving 10-20% of annual income, or even more if you think job security is a concern.

There are also psychological aspects of preparing for a recession, and it’s important to manage emotions and make financial decisions based on facts. Reviewing personal spending habits and identifying areas to cut back in case of financial strain can be a helpful preparation strategy.

Remember that recessions are periodic and manageable. Plan ahead, and don't let fear or emotions get in the way of sound financial decisions.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

-Find us on Facebook: www.facebook.com/friendstalkfinancialplanning

#ACPMemberWisdom #recession #financialplanning 

TRANSCRIPT:

Bridget: Recession, recession, recession. John, everybody's talking about the fact that there's going to be a recession, and we're talking to clients about how to prepare, and what we do to help them prepare, whether they're thinking about it or not. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we jump into recession talk, I want to remind everybody, hit that subscribe button. Give us a thumbs up. Help other people find this information on YouTube. And with that, I'm curious to know if your crystal ball came out of the shop because you're predicting a recession.

Bridget: Haha! Exactly.

John: I've been predicting one for three years. Maybe we’ll be right eventually.

Bridget: Yeah. Exactly. There's going to be a recession. I don't know when but maybe soon. And so I've been looking into recessions a little bit and I can tell you that they generally happen every five years or 10 years. The most recent one was during COVID, and it only lasted two months. That was in 2020. And then the one before that was the Great Recession, which a lot of us remember, in 2008, and I think that lasted till 2011 or so. So that was a 10-year span and then we just had a two-month recession. But usually, it's around every five years but then sometimes you get a little reprieve, and you get every 10 years.

So most of our viewers have been through this before. And they make the official call after the economy has started feeling the pain. So from my perspective, a lot of it has to do with hiring and employment. And if employment isn't down, it's hard to say that there's a recession. So if hiring goes down and employment is down, that's when we're going to start really thinking about it. And the latest numbers I saw was that hiring was lower but it wasn't like it was negative. So that’s what we kind of look for. But a lot of people are talking about it for good reason, I think because people feel afraid.

They feel like something's going to happen and it's going to hurt them. That's fear in a nutshell. So then they think, “What should I do?” And one thing they could do is hunker down and save some more money. That will probably help them. However, lower consumer spending is probably going to hurt the economy, and everybody doing that because of recession. So there's some circular logic, but it might help you, the individual. So it’s going to help the group. But I'm not saying take one for the group on this, because nobody's going to appreciate it.

John: Yeah.

Bridget: So the first tip really is look at your emergency funds. Do you have adequate emergency funds? John and I think recommend at least 10% to 20% of your annual income. We use annual income and a percentage of that because people know what their annual income is. They don't know how much they spend, but they know what their income is. So what's your annual income? Save 10% or 20% of that. And then if they're talking about layoffs at my company. I'm a self-employed person. I'm an artist. I'm a contractor. Anything like that where, I hate to break it to you, but you're living on the edge.

Have a bigger emergency fund. It's great to be one of those people but just have a bigger emergency fund. That's fine. But we recommend saving twice as much, so that means 20% to 40% of your annual income in your emergency fund. So that's my first big tip is just make sure you've got an emergency fund, especially if you think you might be affected. And I gotta break it to people who are artists, contractors, they're the first people to get cut. And that's fine, just save some more money.

John: Yeah, I think that's great. It reminds me of the old adage, “You've got to put your parachute on before you need it.” When there're times of uncertainty, increase your saving. We talked about some of those numbers, 20% of income and, and if you're concerned about your job security or just what's going on, if it makes you feel better, maybe you need to save more than that just for comfort. There’s nothing wrong with that at all. It’s interesting Bridget, as you were describing how recessions work and those things, what occurred to me is that so much of it, is psychological. I mean, there's the factual.

If I lose my job, if I get cut as a contractor, there's the reality, but then a lot of it is just, how do I feel about this? And so, maybe having a bigger security blanket in the form of more cash in the bank makes you feel better and more able to weather whatever storm might be coming. And the other thing that was really helpful for me, and I'm glad you brought it up in the beginning, is that we see a recession every five to 10 years. So it's not like, what are we going to do if a recession comes? No, we're going to have recessions periodically.

And when it's something to be avoided and something unexpected, that sense of fear and unsettlement and all the other things that go with it are really challenging. But when you go, oh, yeah, that's right. Periodically, I get colds in the winter here in Wisconsin. That's a bummer. But I'm probably not dying. Just being able to have some separation from it and go, oh, yeah, that's right. This happens periodically. It's not like it's fun, but for me anyway, it makes it much less scary when you know what to anticipate.

Bridget: Exactly. It's like we get snow in Chicago, and they get hurricanes in Florida. It just happens. And when, I don't know. We just got some today. I don't know, we just got some. I don't know when it's going to happen, but it'll happen.

John: Right.

Bridget: It happens. And it's not the most pleasant experience generally but…

John: …it's okay.

Bridget: Yeah, it's okay.

John: Right.

Bridget: There’s another thing about increasing emergency funds, and I was just talking to some people about this yesterday. They would like to get a vacation home. What's expensive right now? Vacation homes. What might go down in price if there's a recession? Vacation homes. It might not make you feel good to get a price break because somebody lost their job and has to sell their vacation home. But you might be able to do that, so there can be silver linings. It can be a great time to act. So if you're thinking, “Oh, wow, maybe I want to hire a contractor to get some stuff done,” save some money, and then see if there's a recession, they might be easier to find, etc. At least that's how it worked in the last recession.

John: Yep. For me, as a corollary to the idea of building up a little bigger safety net from a cash standpoint is also when things are still going well take a look at where spending is for you. And, and listen, when things are going well, we don't get too concerned as long as we're meeting our financial obligations and our saving goals. But maybe you start to take a look at, okay, if I had to make a cut, where would I make a cut in spending? And do I have some elasticity in my budget?

Bridget: Yeah, that's a good way to put it.

John: Right. And you go, hey, when things are going well, maybe I’ll buy that vacation home. I know buying a vacation home is a pretty substantial investment. Maybe I'll take that vacation overseas because I can, and things are okay. But you know what, if we do hit a recession or I do lose my job or something happens, I don't have to do that stuff. That's someplace where I've got some flexibility that now feels like, hey, my spending’s at this level, but geez, I could really cut back should I need to. And again, knowing that I've got some flexibility in my budget can be really helpful. And for me anyway, it's separating out the true needs from the wants.

I don't need to have a European vacation or fill in the blank. I need to get away for a little bit, but I can do a driving vacation if I need. That sort of thought process gives me the mental and emotional wherewithal to go, oh yeah, guess what? If things continue, things go bad, I'm still going to be okay with it. I don't have to have that sense of panic because I've already identified my spending habits. I put on my parachute before I jumped out of the plane. I put on my parachute so that in case the plane crashes I can jump out and be safe. Oh yeah, that's right here, I'll cut this out, I'll cut that out. And I've already planned for it before it's a stressful, red-letter situation.

Bridget: Yeah. And along that line I would also ask what's happened to you during previous recessions?

John: Right.

Bridget: I would say COVID helped my business. The Great Recession, that's when I started my business, so it helped my business. Previous recessions, for me, financially, have been kind of a plus. But other people might have trauma from that. But then you can remind yourself, well, what's different about my situation now? Oh, I lost my job in 1999. But I'm retired now. What do I care? I don't have a job. Oh, wait, that's right. I don't have a job. My income is steady. A recession isn't going to impact me that much.

John: Yeah. Looking at some of the facts.

Bridget: Exactly. And just reminding yourself that you might not be in a vulnerable situation, but you might have trauma from back when you were in a vulnerable situation. That makes you more afraid than you need to be.

John: Yeah. Going back, the feelings and the facts are both really important, but sometimes they are two different things, and that's really useful to recognize.

Bridget: Yeah, exactly. So in this situation, look where you're vulnerable, but don't get too worried. It's just part of the financial cycle. And we've been having good times for a long time. So, sooner or later it'll happen. I don't know when.

John: That's right.

Bridget: Yeah. Cool. Anyway, it's a great time to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients. We'd love to hear from you, but we are also both members of the Alliance of Comprehensive Planners. If you like what you hear on our show and would like to find an advisor that's local to your area who thinks similar to the way that we do, you can check out acplanners.org.

Bridget: And please subscribe.

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.