Category: Financial Literacy

What Is A Recession?

The Idea of an impending recession can be scary, but it can help to understand what it is and how to prepare.

There’s a lot going on in the world. In addition to the coronavirus pandemic, there are rumors of a looming recession. You have likely heard one of two things by now:

  • We are in a recession, or
  • We are about to go into a recession

In either case, it’s good to know precisely what a recession is, how to prepare for one, and tips on how to get through it.

Definition of Economic Recession

A Recession is a period in the business cycle when economic activities are in a general decline, typically accompanied by elevated unemployment, a fall in consumer spending, an increase in business failures, and falling stock markets. As scary as they are, recessions are a normal occurrence in the modern economy (see below image of typical business cycle). A recession follows the peak of the business cycle.

In the U.S., recessions are declared by the National Bureau of Economic Research‘s business cycle dating committee – which, despite its name, has nothing to do with Tinder.

The dating committee is a bunch of renowned economists who gather to assess how the economy is doing. They determine when recessions formally start and end.

The committee weighs several factors in its decision, but a commonly used definition of recession is when the total value of goods and services in the U.S. (called the Gross Domestic Product or GDP) is in decline for two or more quarters ( six months or more).

Are we in a recession?

Yes and no.

Yes we’re in a recession but it’s not official yet.

On one hand, because the data isn’t nailed down and the committee hasn’t officially said so, we are not in a recession yet. BUT, because the committee usually retroactively calls recessions, we are more than likely in a recession. (For context, the committee declared in December 2008 that the Great Recession had started in December 2007 – a full year later!).

We need at least 2 quarters of negative GDP to declare it a recession. The first quarter of 2020 saw a decline of 4.8%. If we see another sequential quarter decline in GDP, the committee can officially say we are in a recession.

Impacts of a recession

Recessions, while a normal part of the business cycle, can be very destructive because it causes a rise in unemployment. As unemployment rises, consumer spending falls because people don’t have money for the discretionary items. People also lose their homes because they can’t afford the mortgage payments and young people can’t get a good job after school. Investments lose their value and businesses go bankrupt.

Difference between a Recession & a Depression

A recession can become a depression if it lasts long enough. As a reminder, a recession is an economic contraction of two or more quarters. A depression will last several years.

How to Prepare for a Recession

It’s all about the long-term. Recessions since the end of WWII have lasted anywhere from six months to sixteen months, with the average lasting 11 months.

Recessions are going to happen and there’s nothing any of us can do about it. The critical take away is that we need to be prepared. Is it possilbe to recession-proof your finances? The answer is yes and here are some specific ways you can do it:

  1. Pay Off All Debt
    Debt is a problem even when the economy is booming. But, it’s an even bigger problem during recessions, when you may be facing the possibility of losing your job or experiencing a serious decline in the value of your investments.

    Whether it’s credit cards, student loans, medical bills, or any other type of financing, the more you can eliminate, the fewer payments you will have. That will make the loss of your job that much easier to deal with, especially if you’re unemployed for several months.

    If you can’t pay off all your debts, pay off or pay down as many as you can. The more you can pay, the stronger your financial position will be if your personal financial situation starts to look shaky.
  2. Increase Your Emergency Fund
    Emergencies can happen in times are good, but they tend to be more frequent in recessions. Having a well-stocked emergency fund is the best way to prepare in advance.
  3. Build Your “IA’s” – Intellectual Assets
    This is all about improving your skills and qualifications. If a recession is coming, or already here, one of the best strategies to keep yourself relevant on a career front is to improve your abilities. That might mean getting an advanced degree. But, it could also mean taking online courses or getting an important certification – anything that could help your career move forward and/or increase your earning potential.
  4. Create a Side Hustle
    Get a job that supplies additional income and provides a way to diversify your income sources. It could be an online business or driving for Uber or a food delivery service.

Tips to Survive a Recession if You Lose Your Job

  1. Get On a Budget
    If you aren’t already living on a budget, the time is NOW!
    For more on why a budget is so important and how to set one up, click here.

    Look for ways to cut..subscriptions, groceries, utilities, etc. Everything that isn’t “locked in” and cut back.
  2. Take care of the Four Walls
    When the going gets rough, focus on the things you really need to survive: Food, Utilities, Shelter, Transportation.
  3. Pause paying off debt
    When you’re just trying to make it to another day, you don’t need to pay extra on your debt. Instead, focus on piling up cash as high as you can. This will help with peace of mind until you have income again. Once life gets back to normal and everything is ok, you can pickup where you left off with your debt payoff plan.
  4. Sell Stuff
    Look for things to sell around the house and list them on on Amazon Marketplace, Poshmark, Mercari, Your Local Facebook page, Craigslist, etc. Sell so much stuff that the kids think they’re next!
  5. Look for a side hustle
    This may not be your ideal way to earn a living, but when they going gets tough, the tough get going. Get out there and do what you can to earn extra cash to survive this difficult time.
  6. Don’t lose hope
    You may be losing a paycheck, but that doesn’t mean you need to lose your hope too. Hang in there!

Summary

While recessions are “normal”, they are difficult to navigate and often devastating if unprepared for one. The best things you can do are to prepare by cutting back on your expenses, paying off debt, and building emergency savings. And, if you find yourself out of work, make sure you budget to cut back where you can. Focus on the 4 walls, sell stuff, and look for a side hustle.

Most important, don’t lose hope!

Have questions?

Please feel free to contact me either through a message via my blog or email me @ moneysmartjackson@gmail.com.

The 10 Best Personal Finance Books for 2020

April is Financial Literacy Month so I wanted to highlight some great personal finance books that are worthwhile reads and why I recommend them.

The internet is a great source for information about personal finance. If you want to know how an index funds work, which debt repayment method is most effective, or how to save money on groceries, you can find ten articles with the information you need to know.

Sometimes, nothing beats an old fashioned book when it comes to learning about a specific topic. There are a lot of books out there on how to earn, save, budget, spend money and invest. But, deciding which book to invest your time and money on can be overwhelming so I’ve a compiled a list of the books I recommend and what each is “best for”. These 10 personal finance books can help you get started on your journey into personal finance.

These are the best personal finance books for 2020:

BEST BOOKS FOR BEGINNERS:

The Richest Man in Babylon

This is a great beginner book and particularly useful for young adults (can be as young as 16) and those that need/want guidance on spending, budgeting and investing at any age. It’s regarded as a classic for personal finance advice.

The book dispenses its knowledge through a collection of parables set 8,000 years ago in ancient Babylon. The main points are: save (at least) 10% of everything you earn and don’t confuse your necessary expenses with your desires; work hard to improve your skills so you can ensure a steady income; and invest your money safely.

I like it because it’s a quick read, easy to understand, and keeps you engaged while offering sound bits of financial wisdom.

Get a Financial Life: Personal Finance in your Twenties and Thirties

This book is aimed at young adults and focuses on the basics. From doing taxes to debt repayment strategies, Beth Kopliner gives a thorough foundation for anyone wanting to establish a financial life for themselves.

Broke Millennial

Author Erin Lowry makes things easy for young adults who are overwhelmed and confused about debt and budgeting with this smart, motivating guide. Promising to show how to go from “flat-broke to financial badass,” it differs from other personal finance books by covering tricky, real-life situations involving money, from managing student loans to not being able to split the bill with friends. Among the plethora of personal finance books made for older people, Broke Millennial offers a fun, relatable take on managing money for beginners.

Rich Dad Poor Dad

If personal finance is new to you, then you might want to check out the 1997 classic, “Rich Dad, Poor Dad.” This book tells parables about personal finance while advocating for real assets and investments, including real estate.
It doesn’t tell you how to build wealth by avoiding Starbucks and fast food; but how to build successful businesses that will create passive income for you. It’s not about asking for a five percent raise at your job, it’s about creating streams of income that will work for you.

BEST BOOKS FOR INVESTING:

The Little Book of Common Sense Investing

This easy to read book shows you an alternative to actively, poorly managed, overpaid funds by introducing you to low-cost, passive index funds as a sustainable investing strategy, which gets you the retirement savings you need without the usual hassle of stock investing.

The Simple Path to Wealth

JL Collins is a huge fan of John Bogle, the founder of Vanguard and the author of the book above titled “The Little Book of Common Sense Investing”. This book is a guide to money and investing for people who realize that money is important, but would rather spend their time raising kids, advancing in their careers, pursuing other passions and making the world a better place. It’s easy to understand and filled with lots of practical advise. It’s one of my favorite financial books.

BEST BOOKS FOR INSPIRATION:

The Millionaire Next Door

To truly understand how to accumulate wealth, business professors William D. Danko and Thomas J. Stanley explore the seven common traits found among millionaires.
After years of research into the wealthy, the authors interestingly found that most of them don’t live in Beverly Hills or drive fancy cars. Instead, these people acquired most of their wealth by working hard, living frugally, and saving most of their money. Contrary to the media’s flashy depiction of millionaires, the book emphasizes how to get rich without needing a high-profile job or degree.

Your Money Or Your Life

This book encourages readers to take a step back and think about the their ultimate goals and how much money they’ll need to get there. The simple premise of the book is the question: How much money are you willing to trade your life for? Whenever you’re working, your trading your life and energy for money. What does that mean to you? Once you’re clear on the “why” behind your saving and spending, making decisions about investing and budgeting becomes much easier. 

BEST FOR DEBT MANAGEMENT:

The Total Money Makeover

When Dave Ramsey talks about money and finances, people sit up and listen. This is no get-rich-quick scheme — Ramsey’s books never are. The book provides a solid foundation for saving enough money so that the next life emergency won’t derail your finances and you can retire comfortably. Ramsey’s foundations, setup as “baby steps” has always involved paying off your debt so you can get there, and he tells you how.

Best For Building Wealth

The Automatic Millionaire

This book is straight forward. It describes how to take the hard work and willpower out of the saving equation by automating your saving and investing. It’s a classic read to learn why it’s so important to set-up a cash flow system that works and to watch out for all of the little expenses. Bach highlights the fact that changing your habits in a way that you can stick to them, and knowing what’s meaningful to you in your own life and prioritizing that, is what’s going to help you succeed.

Summary

Each of these books offers something unique to learn within the personal finance world. They’re all worthwhile but where you start would depend on where you are in your financial journey. If you’re new, I’d start with the books that are best for beginners. If you are in debt, I’d definitely read “Total Money Makeover” by Dave Ramsey. And, if you’re ready to get into investing, I would read both “The Simple Path to Wealth” by JL Collins and “The Little Book of Common Sense Investing” by the great John Bogle.

Happy Financial Literacy Month and happy reading!

~SMJ