If you haven’t already, check out Part 1. Otherwise, let’s plow forward into how you can prepare for the next recession
5. Invest your money regularly
Regularly investing in your retirement accounts will get you used to weathering stock market pullbacks. It will build your tolerance for ignoring the noise when the next recession happens. More importantly, it will probably make you richer.
“Be fearful when others are greedy and gready when others are fearful”Warren Buffett
One of the worst things anyone could have done in the 2008 recession was to sell-off their portfolio. I have heard stories about people liquidating their 401(k) after it took nearly 40% hit. Plus they likely had to pay a 10% penalty for taking an early withdrawal from their retirement account.
It is scary, but as you’ve learned in part 1, recessions are normal and investing like you normally would during a bull market will reward you with riches if you can weather the storm.
We regularly invest through our tax-advantaged retirement accounts 401ks, 403bs, ROTH IRA’s & HSA’s.
After we max our tax-advantaged accounts, we have also funded our taxable brokerage account. Recently we have been doing less of that and have been saving for other investment opportunities likely real-estate related. It’s nice to know that we will not be missing out on any market gains and will be in a position of power if an opportunity were to ever surface.
“Luck Is What Happens When Preparation Meets Opportunity”Roman philosopher Seneca
Take Action: As long as you have no high-interest debts, an emergency fund and have enough for planned expenses, start by placing money in your company’s employer-sponsored retirement plan up to the employer contribution match. Know how much your company matches and when you are fully vested. If you don’t have an employer defined tax-deferred retirement plans such as a 401(k), 403(b), 457, or TSP, look into a Roth IRA.
6. Improve your credit score
Your credit score is an indicator of how likely you are in paying off your loans or debts. Lenders, credit card companies, and even landlords use your credit score to determine whether or not to approve your application and how much to charge.
Those with bad credit scores will, unfortunately, get charged more just to live life because they carry more risk. Anywhere from the mortgage, rent, and auto loans become more expensive.
This is bad when the economy is good and even worse when the media headlines scream “end of the world”.
Here is a general breakdown of how the industry grades your credit.
- 300-629: Bad credit
- 630-689: Average credit
- 690-719: Good credit
- 720 and up: Excellent credit
Just as bad credit is disadvantageous, excellent credit can be extremely advantageous. During a recession, you may want to take advantage of the market by picking up some great real estate deals. A good credit score can sweeten the deal and give you a low-interest mortgage.
Good credit can also get you approved for awesome credit cards, like the Discover it cash back card. This no annual fee card will give you 5% back on popular rotating categories up to $1,500 of spending each quarter. On top of this, Discover will match your cash back in the first year.
This means you will actually get 10% cash back on up to $1,500 of spending per quarter for stores like Amazon, Walmart, Target, restaurants, gas stations, wholesale clubs, and Uber/Lyft.
Apply using my referral link and we will both get a $50 statement credit if you make a purchase within the first 3 months.
If you want more details on the card, click the referral link and check out the terms and conditions info link above the photo of the card.
Credit Score Factors
I listed some factors that impact your credit score plus the relative weight each item holds
- Payment history (35%): These Include credit card bills, student loans, mortgage loans, and car loans. Unpaid medical bills, child support, parking tickets, rent, gym memberships, bank fees, etc can go to third party debt collectors and negatively impact your credit score.
- Credit utilization ratio (30%): How much credit are you using relative to how much credit you have.
- Credit history (15%): Age of the oldest credit account and the average age of your combined accounts.
- Account mix (10%): A good mix of revolving debt (Credit Cards) & installment debt (auto loans & mortgages).
- Credit inquiries (10%): There are soft inquiries and hard inquiries. Hard inquiries happen when lenders, credit card companies and cell phone companies pull your credit record. These hard inquiries can temporarily lower your credit score.
This information was summarized from credit.com
Take action: As long as you pay off your credit cards each month, ask to increase your credit limit to reduce your credit utilization. Set up automatic payments for at least the minimum amount on your credit cards, mortgage, or other loans. If you are struggling to pay off your credit cards, begin cutting them up and use the cash envelop system.
7. Grow Cash
Growing cash is a great strategy before you are comfortable investing and after you become comfortable with investing. Cash presents you with opportunity because of your immediate buying power without the need for borrowing. This becomes essential when you see an investment or business opportunity in times when banks are nervous about lending.
Whether you are stashing cash because you are still nervous about investing your money or because you are saving for an investment opportunity, I would recommend placing it in a high yield savings account.
Most online banks are offering 1.80% APY which is enough to keep up with inflation but it may start to fall behind by 2020 (source).
8. Start a side-hustle
Having multiple streams of income is safer than just having one. In a recession or other times of need, you will thank yourself that you can lean on other income streams.
Your side-hustle can range in complexity. It can be as simple as working for Uber or starting your own business.
A side hustle is any job or work you do for money in addition to your full-time job.
Ever since I decided to aggressively pay off my student loans, I have been working 48-56 hours per week. I am slowly cutting down from 56 hours to 48 hours per week.
- I work as a regular PRN physical therapist at a local clinic
- Driving around neighborhoods while working, I sometimes find things people throw out. Then I sell them online. I call this trash for cash. My profits go in an investment account at M1 where I can trade fractional shares for free!
9. Learn how to claim capital losses while staying invested
It is never the goal to buy high and sell low, but when your portfolio has taken a considerable dip, take the loss and then buy a different fund. This is an advance tax optimization and trading strategy called tax-loss harvesting. You cannot buy the exact fund back within 31 days, otherwise, you cannot claim the loss. This is called the wash-sale rule.
In 2018 and 2019, the maximum loss you could claim was $3,000 for those married and filing jointly.
When filing taxes in 2019, my wife and I claimed $8,000 in losses for the prior year and received a $3,000 tax deduction on our income tax report. This put about $1,000 back in our pockets. The remaining $5,000 can be rolled over year after year.
If you are interested in this, we urge you to do more research and consult a tax advisor. We are just normal people who are just letting you know such strategies exist.
Art is the founder of Flexcents, a blog created in 2018 to help others reach their fitness and financial goals through sharing insights as a physical therapist, personal finance nerd, and self-directed investor.