How to Protect Your Finances from a Recession
On Monday I wrote about the impact that the Coronavirus is having on financial markets and people's investments. At the time, the biggest impact in North America seemed to be in the stock market and what that was doing in the short term to people's portfolios.
Monday sure seems like a long time ago.
Starting Wednesday night a number of high profile Coronavirus cases changed everyone's perception of the Coronavirus pandemic.
Starting with a surreal in the NBA where games were suddenly halted when it was discovered that Utah Jazz center Rudy Gobert tested positive for Coronavirus.
Within an hour of that happening it was reported that Tom Hanks and his wife also tested positive for coronavirus.
Trump declared a 30-day travel ban to the EU which sent the stock market into another nosedive.
Within 24 hours of those events, it was reported that Canadian Prime Minister, Justin Trudeau's wife, Sophie Grégoire Trudeau, tested positive for coronavirus.
On Friday, Trump declared a national emergency to combat the coronavirus.
Oh, and did I forget to mention that Russia and Saudi Ariba started a price war over oil that sent prices down over 30%?
This is no longer an issue impacting the stock market, but the entire economy.
The phrase of 2020: social distancing
7 Days ago, I had never heard of the word "social distancing". Now it is a reality for millions of people. Social distancing means cutting off all non-essential human contact. Since the virus spreads person to person, if you are around as few people as possible you are less likely to contract the virus or spread it to others.
Social distancing is a strategy to "flatten the curve" of the coronavirus. The real danger of the coronavirus is a spike in positive cases can overrun our hospitals and healthcare system. If all of our medical resources are focused on handling a flood of coronavirus patients, what happens to someone who had a stroke or was in a car accident? Who will be there to take care of them?
In an effort to prevent the healthcare system from being overrun, we need to slow (not stop) the spread of the virus. The difference between a hospital receiving 100 coronavirus patients and 20 coronavirus patients a day could save a lot of lives. How do we slow the spread of the virus? We practice social distancing and eliminate any non-essential human contact for as long as it takes to get a handle on the virus.
Social distancing is our civic duty.
It will also have significant economic impacts
What happens when everything is canceled?
Over the past few days, nearly every event that requires travel or the gathering of lots of people has been canceled or postponed indefinitely.
Social distancing means not doing any of the following activities.
Going to restaurants and coffee shops
Going to the movies
Going to shopping malls
For those of us who are lucky enough to be able to work from home, it also means not going into the office. I have been instructed to work from home over the next three weeks. I am lucky enough to work in a job and an organization that allows me to do so.
Others are not so lucky. The economic impact of the coronavirus and the necessary practice of social distancing is going to hurt a lot of businesses, big and small. That means people will be laid off or lose their job.
In the U.S and Canada, the strong job market and high consumer spending has been what's kept the economy growing. If that job market weakens, it's possible we slip into an economic recession.
What is a recession?
The technical definition that economists use to define a recession is two straight quarters of negative GDP growth. Not all recessions are created equal. There have been some recessions that came and went and nobody even noticed before it was already over. Other recessions like in 2008-2009 will leave lasting impacts for a generation.
While all recessions are different, here are some things that typically happen during a recession.
The unemployment rate goes up.
Home prices fall.
The Stock Market Falls.
Households and governments take on more debt.
So basically, all of the factors that have been working in our favor the past few years could reverse course and work against us.
I am not saying that the Coronavirus will cause a recession, but it certainly raises the possibility.
How to prepare your finances for a recession?
Whether a recession hits in 2020 or not, this is a good opportunity to take some defensive measures to safeguard your finances from that possibility.
Here are a few things you can do today, that could keep you and your family out of hot water if a recession hits.
Don't take your job security for granted
The people who lose their jobs and their income during a recession are the ones who will be forced to sell their investments at a loss and go into debt to get by.
If you can maintain your current income through a recession, not only can you avoid debt but you can benefit from investing while stocks are cheap.
To a certain extent, job security might be out of your hands. If the company you work for goes out of business, you will lose your job.
However, many businesses will cut some but not all jobs during a recession. Your number one goal should be to make yourself irreplaceable at work.
Clear your debts
If you are sitting on a pile of credit card debt during a time of economic expansion, odds are you will struggle more than most during a recession.
Reign in your spending and start getting aggressive about clearing your credit card and other consumer debt.
You might consider one of the three proven strategies to pay off debt.
Consolidating high-interest debt.
The snowball method.
The avalanche method.
Ensure you have a strong emergency fund
The first action item in the 30-day Blueprint method is to build a strong emergency fund. That has been a difficult lesson for people to accept during the past 10 years. When the economy is doing great and things are relatively easy, nobody wants to worry about defensive strategies like having 3-6 months worth of living expenses set aside in cash.
However, as we are experiencing economic conditions can turn on a dime. Having access to liquidity AKA cash in times of economic turmoil can make all the difference.
If you lose your job and have 6 months' worth of living expenses on hand, you are in a much better position than someone who loses their job and won't be able to make their next mortgage payment.
I have no idea what the final impacts of the coronavirus will be or how long we will need to practice social distancing. The primary thing we need to be concerned about is our health and the health of the global community.
That being said, we are likely to face some choppy economic waters. By doing everything you can to strengthen your job security, paying down consumer debt and boosting your emergency fund you can put yourself in the best position to get through a possible recession.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.