How to Prep for a Fragile or Broken Economy
Most of us like to think of ourselves as financially self-sufficient. We work hard, pay our bills, and pay our taxes. The days of relying on our parents for financial support are deep in the rearview mirror for most of us.
Many of us have families who depend upon our financial security. Our families may be a motivating factor to get out of bed in the morning, fight through traffic, and slug it out at work.
Although we all have fought through hard times, we find a way to stand on our own two feet. We are proud of this accomplishment – as we should be. Being financially secure is tied to our identity and our self-esteem.
Anything that poses a risk to our financial security can quickly find its way into our nightmares. Typically, these fears center around losing our jobs due to being fired, laid off, or having our company go out of business.
However, it is necessary to recognize that economic factors beyond your control could result in a significant upheaval to your financial security. These factors are often overlooked because aside from the recession of 2009, we have enjoyed years of relative economic stability.
As is often the case, past performance does not guarantee future results. Hoping that a rock-bottom economic event doesn’t occur is not a plan. If you fail to plan, prepare to fail.
A Society Struggling with Inflation
Inflation is a concept that is foreign to most people. Sure, the average citizen may understand that inflation means higher prices, but most people are in the dark when it comes to understanding the nuances and the impacts of inflation.
Part of the reason for this in the United States of America is that inflation has been mostly held in check for decades. We have grown comfortable with an annual inflation level of 3 percent or less.
The Consumer Price Index (CPI) measures inflation. The CPI for 2021 was 7 percent. By most economists’ accounts, inflation is here to stay and will likely worsen before it gets better.
The last time we saw double-digit inflation rates was in 1981. In theory, inflation shouldn’t impact our quality of life that much. If the cost of everything goes up by 7 percent, one might think that includes wages (your salary).
Wages always lag inflation, which essentially causes an effective reduction in your pay. For example, in 2021, inflation was 7 percent while wages rose, on average, 3 percent.
This means that the average worker received an effective wage reduction of 4 percent.
Additionally, the situation is compounded because inflation impacts different goods and services uniquely. For example, you don’t need to be an economist to observe that your price at the pump and the grocery store has gone up more than 7 percent this year.
In light of this information, a reasonable person may ask, “What causes inflation, and how do we stop it?” There is little agreement among economists on answering this seemingly straightforward question.
However, what we do know is that inflation is generally caused by introducing more currency into the marketplace. Just like any other commodity or investment vehicle, the more there is of something, the less it is worth.
The amount of money in the economy due to federal government spending has gone up significantly in the last few years. Most reasonable people would agree that there are inflationary consequences of flooding the economy with more currency.
Sometimes excessive government spending can lead to hyperinflation, which is inflation on a runaway train. Citizens of Venezuela, Lebanon, Zimbabwe, and Yugoslavia can speak from first-hand experience what it is like to live in an economy with inflation rates greater than 100%.
Long story short, an inflation depression grinds economic activity to a screeching halt while bringing the citizens of the country to their knees financially. This is currently happening in the United States – so what can you do now and what if it worsens?
What to Do When a Recession Takes Root
Recessionary periods are not a matter of “if” – it’s only a matter of “when.” The consequences of a recession to your financial security can vary from complete devastation to a minor inconvenience, and the specifics are nearly impossible to predict.
However, here are three things that you should consider today in preparation for a recession tomorrow:
1. Have a rainy day savings account.
This savings account should be funded with enough money to cover at least three months of expenses. It’s recommended that this savings account be separate from any other investment accounts that you may have.
Although the paltry interest rate of a savings account may tempt you to invest this money in the stock market, consider the possibility of a stock market crash as the impetus for a recession.
Your rainy day fund should be liquid and recession-proof. There is no better way to accomplish this than a basic savings account. Although there is nothing magic about three months, the peace of mind that accompanies knowing that you and your family will have three months to figure out a solution to even the worst-case scenario is worth any sacrifices that may be required to amass it.
2. Have a side hustle.
Even if your side hustle isn’t landing you on the cover of Entrepreneur magazine, the fact that you have one can serve as an invaluable safety net. Imagine that you lose your job with no notice, and you receive no severance package.
Further, assume that the country is immersed in a recession and the job market is tight. Finding and launching an unconventional way to earn money, under those circumstances would be stressful, time-consuming, and likely unsuccessful.
The best part about running a side-hustle when you don’t need to have one is that the breathing room allows you to experiment. You find out what works, what doesn’t work, who your clients are, what competitive rates are, and what you have to offer to the marketplace.
Even if your side hustle only pulls in a few hundred dollars a month today, it provides you with a platform from which to scale when the chips are down. Do this early – not during a panic scenario.
3. Tend to your network.
It’s not what you know – it’s who you know. When you consider that up to 80 percent of jobs are filled by personal connections, the importance of having a strong network if you were to find yourself unemployed in the middle of a recession cannot be understated.
Regardless of how many contacts you have on LinkedIn, your network is only effective when you tend to the relationships that compose your inner circle. Take the time to reach out to one person a week in your network just to converse with them about something they’re involved in.
Ask people in your network if you can help them with anything. Commit to getting a cup of coffee with someone in your circle each month. Just like any other relationship, if you fail to make an effort to keep the relationship alive, it will wither and die.
At the risk of sounding too utilitarian, if you wait until you need something to reach out to your circle, you will be gravely disappointed in the effectiveness of your contacts. They won’t know you – but they will remember those who took time and made an effort to stay in touch.
Eliminate Debt as Soon as Possible
Being heavily in debt can be suffocating. As you prioritize your financial goals, paying off high-interest debt must top the list. Not only does debt drive up your monthly expenses, but it eats away at your future earnings as well.
It’s not uncommon for people to hold balances on credit cards with annual interest rates of 20 percent or higher. If you are one of these people and have fallen into the trap of making the minimum monthly payments, you are sacrificing your financial future.
Consider the “Rule of 72.” Divide the interest rate into 72. The result is the number of years it takes your debt to double. For example, a balance held on a credit card with a 20 percent APR will double every 3.6 years (72/20).
If you hold multiple sources of debt, consider using a debt consolidation service to simplify your challenge of paying down your debt. These companies can, at a price, consolidate all of your debt into one account with one required monthly payment.
Although mathematically, these services may not save you much money, psychologically, they have been shown to assist people in accelerating their debt repayment as it is much simpler to focus on one monthly payment.
Of course, it’s wise to avoid debt in the first place. Consider the following practices to keep your debt to a minimum:
1. Budget your money.
Your budget serves a true north to your financial decisions. There is a reason that every business, large or small, creates an annual budget. Your personal finances are no less important than any business.
Sticking to your budget, similar to sticking to a diet, can be challenging at first. However, be persistent, and in time, you will find that your habits have changed. These habits are the key to paying off your debt and building up your savings.
2. Maintain a strong credit score.
It can be expensive to have a poor credit score. Let’s assume that you use a loan to buy a car. The difference between the interest rate with a good credit score and a fair credit score could easily be 8 percent or more.
On a $30,000 car, that difference over the life of a five-year loan is $16,000. What could you do with an extra $16,000? You can sign up to monitor your credit score and FICO score on a regular basis for free.
3. Live below your means.
Just because you can afford something doesn’t mean that it’s a wise financial decision to buy it. In fact, as a rule of thumb, if you can’t afford to buy something three times, you shouldn’t buy it.
One of the most impactful debt avoidance (and wealth building) strategies is to avoid scaling up your quality of life with each increase in pay. After your next promotion or pay raise, consider keeping your quality of life constant while increasing your savings rate.
Stocks, Digital Currency and Gold
The question of where to invest your money is not a new one, and you will receive as many different answers as people that you ask. However, there are some basic principles to consider, especially in the context of a bad economy.
Stocks
Stocks represent ownership in a company. The value of a company’s stock is a function of the company’s earnings and the expected growth of those earnings. In a recessionary environment, stocks typically perform poorly because as a company’s earnings and growth outlook go down, so does its share price.
There are exceptions to this relationship. In an inflationary period, stock prices tend to go up to match the rising costs of goods and services. This rise may be partially or fully offset by reduced growth prospects due to the reduced discretionary income of consumers.
Another exception is represented by counter-cyclical stocks, which tend to perform well in poor economic conditions. Examples of industries that are considered counter-cyclical are fast-food companies, insurance providers, educational services, and what’s known as “sin” companies (alcohol, tobacco, adult entertainment).
Digital Currency
Digital currencies such as Bitcoin, Ethereum, Tether, Solana, and hundreds of others have generated speculation, debate, and excitement over the past few years. The idea of decoupling currency from national economic policies seems like a great idea.
Despite the tremendous performance of these assets in the past decade, digital currency remains a risky investment because the market and outlook remain highly volatile and uncertain.
One element worth mentioning is that there is reason to believe that digital currencies could be an effective hedge against inflation because their value is thought to be completely independent of the dollar’s value.
Gold
Gold has long been considered the ultimate and safest hedge against an economic downturn. As an example, during the Great Recession of 2009, gold performed very well while the stock market tanked.
Specifically, in September of 2008, gold was at $700 an ounce, and by October of 2011, gold had reached $1,900 an ounce. Although past performance is no guarantee of future performance, gold has been considered a hedge against economic fluctuations for decades.
Sometimes diversification, a fancy investment term for the age-old saying of “don’t put all of your eggs in one basket,” is the best answer. Instead of trying to figure out what types of investment vehicles align best with what kind of impending recession, spreading your investments out among the different types provides some level of protection.
Surviving in a Complete Collapse of the Economy
In a worst-case scenario, the economy doesn’t suffer from repression or depression, but a complete and total economic collapse. As unlikely as this may be, it would be foolish to say it is impossible.
People have had to deal with this situation throughout world history, and presumably, they, too previously thought that an economic collapse was impossible. As difficult as it may be to imagine, your focus will shift from college and retirement savings account to survival in the wake of economic collapse.
Shelter, food, and protection would be your priorities in such a situation. As such, you should consider stockpiling supplies such as clean water, non-perishable foods, and tools required to grow your food and build/repair shelter.
If you don’t currently possess some level of skill in basic carpentry, electrical work, plumbing, gardening, or hunting, you may want to consider getting some basic training in these areas because not only would you need these, but they can serve as a form of currency to barter with in a complete economic collapse.
If you wait until you need them, you will likely be disappointed in the availability of survival skills courses at your local community college. Your family might enjoy and benefit from a weekend where you simulate economic collapse by living without electricity and eating only non-perishable foods that you’ve stockpiled.
Lastly, it would help if you took the time to build relationships in your community. Survival in a complete economic collapse will be a team sport. Although you risk labeling yourself as a nutty conspiracy theorist, it might not be a bad idea to take inventory of who has what skills in your neighborhood or community.
Taking this idea one step further, if your neighbors are amenable to the idea, conducting a tabletop exercise where you get into details of how you would pull together to survive is probably not a bad idea.
