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:

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.
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.
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.
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

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.
Take care of the Four Walls
When the going gets rough, focus on the things you really need to survive: Food, Utilities, Shelter, Transportation.
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.
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!
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.
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 thought of budgeting often brings a negative response from people. Many people are turned off by the simple term budget. Some of my friends refer to it as the “B” word. The term is associated with restrictions and a lot of hassle and headaches. Can anyone relate?

While I realize it can have a negative connotation, I can not emphasize enough the importance of creating AND maintaining a budget.

I really feel like this is the most important thing you can do for your financial future. Regardless of whether you think you are too poor to budget or too wealthy to budget, you’re not.

Reasons why Budgeting is Important

1) Helps You Reach Your Goals

A budget is a plan that helps prioritize spending. With a budget, you can move to focus your money on the things that are most important to you. It may be getting out of debt, saving up for a home or preparing for retirement. Your budget creates a plan and lets you track it to make sure you are reaching your goals.

2) Helps you Save Money

People who do not have a budget tend to save less money than people who do. This is because when you budget, you assign your money to do certain things. It allows you to automatically put money into a savings or investment account each money (#smartmoneyhabit). A budget helps prevent debt and save money. As you save, you will begin to build wealth. Building wealth is what provides true financial freedom and peace of mind for your future.

3) Helps you Stop Worrying

Most people don’t like the restrictions that having a budget puts on them. However, you decide how much you spend in each category. So, if you want to put a large portion of your money towards leisure activities, as long as you’re saving and meeting your other needs without going into debt, you get that choice. BUT, once you setup limits, you need to stick to them.

4) Budgeting Puts You In Control

If you feel like you’re not in control of your money and you’re constantly wondering where it went and what happened to it, budgeting can put you in control. It allows you to prioritize your spending, track how you are doing, and realize when you need to stop.

Budgeting is the most essential part of financial planning and the best thing you can do for your financial future!

How To Create A Budget

A man and a woman looking at financial papers with a calculator

Step 1: Determine why you want a budget

According to surveys, only one-third of all households live by a strict budget. By deciding to budget, you’re joining a select minority — and your decision will pay off! Budgeters are almost twice as likely to report no financial worries compared to spenders, and they’re less likely to live paycheck to paycheck or struggle with finances. Sold yet?

While budgeting is always a GREAT decision, it helps to define goals before you start the process, since the real reasons you’re budgeting may impact choices you make during the process. Here are a few reasons to create a budget:

Finding a way to save more money
Reduce debt
Reduce overspending on problem areas (Starbucks anyone?)
Making sure your spending reflects your goals and values
Breaking the paycheck-to-paycheck cycle
Avoid spending money you don’t have
Meeting long-term financial/retirement goals

While it may seem silly to think about your motivations, psychology plays a big role in how we handle money. In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating. That’s a lot of benefits right there.

Creating a budget makes it more likely goals will be achieved.
University of Maryland

Step 2: Dive into your current spending habits

Before you can create a realistic budget, you need to know how much you are currently spending. If your budget isn’t realistic, it’s nothing more than a wishlist.

I recommend looking back at your bank and credit card statements for the last 3 months to get an average of each expense category (see below for a list of expenses you might include in your budget).

This is where most people stop. I’m just going to be honest here…you just have to do the work here.. THERE ARE NO SHORTCUTS. Figuring out where your money is going must be part of the budget process.

“You just have to do the work here.. THERE ARE NO SHORTCUTS.
Financial Jackson

Write down all of your expenses in either a spreadsheet or a notebook. I’ve shown a picture of a sample budget worksheet below for visual reference. If you are struggling, here are a couple of resources I think are good, that can help you create your master budget worksheet:

Dave Ramsey’s quick start budget forms click here.
Spreadsheet for creating your master budget worksheet click here.

Sample Master Budget Spreadsheet:

Notice how much income is used up by student loan debt! See my write-up on the Student loan debt crisis here.

Step 3: Write Down Your Total Income

This is your total take-home (after tax) pay. Factor in income from all sources including:

Wage income
Money from side gigs
Alimony and/or child support
Business/Commission income
Income from investments
Social Security

If your income is variable, one of the best budgeting approaches is to pay yourself a salary. This means you’ll decide on a monthly “salary” to base your budget around – I recommend using a worst case scenario here. If/when extra money comes in, save it in case of a bad month later.

Step 4: Subtract Expenses from Income to Equal Zero

This is called zero-based budgeting, meaning your income minus your expenses should equal zero. When you do that, you know that every dollar you make has a place in your budget. If you are negative, look at your budget to check for errors first. If you are still over, look to see what you can cut – Hulu, Disney+, cable, dining out, etc.

Step 5: Track Your Spending

Making a budget is only the first step. You have to figure out how to live by your budget. Now that you have created a Master Budget Spreadsheet, track your spending every week. Every day if you can. It’s the only way you will know if your spending is aligning with your plan.

Here are some ways to track your spending using apps that I have researched and would recommend:

Mint: Mint is free. You link your credit cards, bank accounts and add your budget that you’ve created. Mint will track how well you keep to budget limits. You can choose categories of spending, set limits, specify how frequently each expense will occur, and specify whether to start each month with leftover amounts from prior month (i.e. if you have irregular income).
You Need a Budget (YNAB): I really like this app but it costs money to use it. YNAB costs $11.99 per month or $84 for the annual plan after a free 34 day trial. If you’re not in debt, I think this is a good choice. The free 34 day trial means you can try it out before committing to see if it works for you.
Everydollar: This is a new app created by Dave Ramsey. I like it for the budgeting and tracking components, which are free. But, it falls short when you want to automate your expense tracking by linking your bank and credit cards. While the budgeting and manual input of your expense tracking is free, it costs $129.99 per year to move to the “Plus” version. While I like the visuals he creates for the budget and tracking, I think it’s too expensive for the automation upgrade. So, if you’re only interested in manual tracking and don’t want to integrate your bank and credit card accounts, I think this is a good tool. If you want to automate, Mint is free.
Spreadsheet: If you’re not tech savvy or don’t like computer based programs, the spreadsheet I mentioned above when creating your Master Budgeting worksheet, can also be used to track your expenses.
Plain old notebook: no link here. If you are adverse to an app/computer tracker, you can do it manually. I once had an 80 year old client who preferred to do his tax returns, with paper forms. We always double-checked his work using our computer software, but he was always accurate, down to the penny! So, if you like it the “old-fashioned” way, go for it. But, remember to write everything down.

Balance the Budget Weekly

Once you get everything setup and begin spending money, use your spending tracker app (from one of the above options) to keep track of each purchase and bill. About once a week, review where you actually are with what you planned. Have you spent all of your dining money already and now you will be cooking each night until the end of the month? Did you sell some clothes and have extra cash to put towards a credit card or vacation? Make sure you do this religiously. Its so much easier to keep up with it then it is to catch up!

Review Budget Monthly and Setup Next Month’s Budget

Finally, it’s important to check in with your budget and make adjustments as needed. See how you did each month, where you overspent, and if you had extra left over. Then, adjust your budget according to what you’ve learned and set yourself up for success the following month.

That’s it! If it seems like a lot at first, you’re not alone. Budgeting takes practice, just like everything else in life. Do you have questions about getting a budget started or utilizing one of the spending trackers listed above, please feel free to reach out to me. I’m happy to help!

~Financial Jackson

Tag: Debt

What Is A Recession?