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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.
Everyone is talking about how to prepare for the next recession, frankly, I do not blame them. However, no one is talking about how to prevent the recession.
As hard as it is to believe, a recession is not a divine punishment from the “gods of the economy” for spending money incorrectly. A recession is a response to people decreasing spending and increasing saving. In other words, a recession happens because of a decrease in flow of money. These two factors are not the core factors, they are caused by multiple external factors. Some of these factors include large inflation rates, high interest rates, lack of growth in real wages, and lack of consumer confidence. But ultimately, a recession is a response to people’s behaviors when these occur. The economy is not a separate entity, it is everyone. You already have the answers to prevent the recession.
Your Income Is Someone Else’s Spending
Money is not mana from the “gods of the economy,” it has to have an origin. Whenever you or your business is paid, you are being paid by someone who would rather part from their money than to go without your service or product. Someone paid that person that money because they would rather part with that money than to go without that person’s service or product. The Swift Institute, a leading organization in financial research, says that physical money turns over 55 times in a single year. Imagine how often digital money exchanges (I could not find a source so comment below if you know one). Jobs require spending money from people. If people are not spending money, jobs are not made. A low number of jobs usually causes a recession.
To prevent a recession, people must spend more and save less. This is easier said than done. Practically every economist forgets three things. First, you should have a 3-6 month expense saving placed aside. Although spending increases incomes of many people, there will still always be people without jobs who need the money put aside. Second, many purchases including houses and cars require time to save up to. Third, consumers have no obligation to keep other businesses and jobs alive. There are many consumer goods and services available in which my generation are “killing” when these goods and services have no more use. Despite these three facts the best way to prevent a recession is to spend on stocks, goods, and services you find useful.
To prevent a recession:
- Slow down on saving too much.
- Spend only on what you need and what brings you comfort.
- Continue investing, but defensively.
- Pay off debts.
1) Slow Down On Saving Too Much
Suze Orman said that people should save 9 months of expenses because long-term unemployment is more common than before 2008. While I believe she is a great financial expert, I do not agree with her here. I believe you should only have 3-6 months expenses in savings (depending on liquid investments).
While having 9 months of expenses in savings is frugal, it is not wise in my opinion. That would be 3 additional months of expenses in money that are not invested. While long-term unemployment is possible, I do not believe the odds are high enough to save money in case of long-term unemployment at the opportunity cost for investing. I know that sounds strange coming from me because I have a “prepare for the worst mentality.” However, the chances of long-term unemployment, even after 2008 never exceeded 7% and has been decreasing ever since. Also I am married, and my wife and I have two stable incomes, so the chances of dual-unemployment are lower (<0.5% tops). Furthermore, if the worst case scenario happens where you are unemployed for more than 6 months, you can live off some of your more defensive investments and passive incomes.
Of course everyone has different situations. My mindset may probably change in the future when I have kids or a single steady form of income. You yourself should determine how many months of expenses you need. However, you should still have 3 months minimum (preferably 6-9 months), but if you have that saved then growing your savings should not be your focus.
2) Spend Only On What You Need And What Brings You Comfort
It is far from uncommon for anyone to say that during tough times you should only spend money on what you need. So I am going to say the uncommon advice: it is ok to spend on things that bring you comfort, especially during a recession. I have mentioned the three basic needs: food, water, shelter. Essentially anything beyond those three could qualify as “comfort” at least to some degree. Even my retirement fund brings me comfort knowing that I have that for when me and my wife grow old.
Most people say they never bought anything that does not give them comfort. I promise you everyone is groaning with a little buyers remorse. There is the DVD you never watch, cookware you never use, the shirt you never wear. Instead, determine what actually gives you comfort in life, and spend on that.
This will do three things for everyone including yourself. For one, businesses that produce non-essentials can thrive on the money you spend and that will help prevent the recession. While spending your money only on what gives you comfort will keep some businesses alive, it will kill some businesses which do not produce anything that brings people comfort now. This will help transform the economy away from a recession. Not every business needs to survive during tough times, in fact, some need to go for the economy to grow again. Most importantly, purchasing only what brings you comfort reminds you that you are in control of how you spend your money.
It is worth mentioning that spending will better prevent a recession if you spend your money, instead of spend borrowed money. If it was that easy to prevent a recession I would recommend you to get a credit card with no limit and to go wild (I will never recommend that).
3) Continue Investing, But Defensively.
Most believe that the worst thing you could do is invest just before a recession. Trust me, this is not the worst thing you can do financially. You could buy a house you cannot keep over water, you can invest in a scam, or you could never invest. Those are among the worst things you can do.
I previously mentioned how investing in the stock market works, both by explaining how they are assets, and how the stock market uses your money. These do not just exist to give you opportunities. Companies want money to seek out new assets to increase their company value. When people slow down on investing in the stock market, the businesses will no longer have the cash flow to seek new assets to expand and will manage finances more defensively. This will slow down the formation of jobs or even kill jobs. By investing in the stock market, you will encourage the formation of new jobs and the investment into new assets which may prevent the recession.
4) Pay Off Debts
Practically every financial guru I know recommends investing while paying off debts. I do support these notions. But when a recession is coming up I highly recommend paying off debts to a higher degree.
Debt may seem boring to pay off. But it is a legal contract in which you must oblige to, at least to some degree. There are ways to renegotiate the terms in the debt. But ultimately, someone must pay the debt.
Pay Off Adjusted-Rate Debts Over Fixed-Rate Debts
Fixed-rate debts are not too much to worry about as long as it is manageable. You do not need to try to pay these off quickly. In fact, if you are paying more than the minimum I would recommend reallocating the extra money over the minimum to pay off different debts such as credit card debt and other adjustable-rate debts. These debts tend to have high interest rates. Even if they do not, these interest rates tend to rise during a recession.
In addition to saving you money, the firms and investors in charge of the debt (trust me you’d be surprised how long the debt chain goes) are more likely to loan money to different people when you pay off your debts. Fixed-rate debts should be paid off too, but not as much as adjustable-rate debts. However, fixed-rate debts are considered lower risk and the firms and investors are not losing too much sweat over them. Ultimately, by paying off your adjusted-rate debts more, you are doing one of the best things you can for yourself and the economy.
Optional: Make A Business
Creating jobs is one of the surest ways to prevent the recession. Most people wait for the government to step in and create new jobs. I say why wait for the government to make these jobs? I strongly believe everyone has potential to create a business and maybe even jobs. That being said, not everyone is set to make a business. It takes more than potential to form a business, it takes drive (and lots of it). If you do not feel the drive to go into business yet, then now is not the time.
You can read many books to see how you feel about the idea and run some thoughts in your head. I personally recommend reading Grit by Angela Duckworth to determine if you have the drive to go for a business. In the book Angela mentions that Warren Buffett said if something you want is not among the top 5 things you want, it is just a distraction. And that is the simplest advice and knowledge she had in her book.
I will not give advice on how to start a business specifically for people in this post. I have given broad advice in previous posts. In some future posts I may write about some more specifics you should do. There are other people to ask for advice in starting a business. Some include Jay Morrison of the Jay Morrison Academy.
Recessions are just responses of the economy. We are the economy. Therefore, recessions are responsive to our behaviors. Most signs and symptoms of a recession can be loosely summed up as self-fulfilled prophecies. Whether these symptoms are responses to people or if these are solid signs of a recession, you should be able to take on the wild ride that the economy takes regardless of how much control you have on it.
I can see many people following this advice already. I know many people who are starting in investing and holding these investments long-term. People are also paying off their credit card and student loan debts. Thanks to the FIRE movement, we now have many people producing intellectual property and enterprises. They are not only producing more money and products, but they are even producing jobs. Altogether we have an excellent recipe going on that makes me believe that the next recession will not be nearly as bad as the 2008 recession (which many debate was actually a depression). However, worrying about the next recession will never make you be rich, but taking every opportunity you have right now will help you to forge your wealth.