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A recession is a period of economic decline characterized by a decrease in gross domestic product (GDP), rising unemployment, reduced consumer spending, and business contraction. It is typically identified when an economy experiences two consecutive quarters of negative GDP growth. Signs of a recession include widespread job losses, declining industrial production, a drop in retail sales, and sometimes a slowdown in housing market activity.
Recessions can cause people to act out of fear, but since there’s not a lot you can do about the economy at large, it is good to evaluate your own financial situation and work on shoring up any areas that are not secure instead of being fearful and worrying about something you can’t control. Here are some questions that can help you assess your financial situation:
Understanding your current spending and anticipating your needs for the next six months is helpful if you want to act with confidence. Ideally, you’ll have what is known as “an emergency fund” covering three to six months of living expenses.
If you don’t have at least three to six months of basic expenses in savings, you could set a financial goal to acquire those funds, specifically plan how you are going to make it happen, and then implement your plan.
There are so many budgeting plans out there, it can be overwhelming. But the good news is you don’t have to use any of them. A good way to budget is to use the 10-20-70 rule. The 10-20-70 rule says 10% of everything you make is yours to keep. That means if you make $10,000 per month, you will keep no less than $1,000.
If you have debt your creditors will get no more than $20,000 which is 20% of your income and your lifestyle will consume no more than $7,000.
If you are spending anymore than 70% of your income on your lifestyle, you’ve got to change that. If you are spending more than 20% on debt you need to fix that problem, but you can keep more than 10% no problem, in fact it’s a big plus if you do! If you have no debt, or when you pay off your debt, you will be able to keep 30% of your income no problem. Is keeping 30% of what you make going to make your life better in the long run?
If you are overspending on your lifestyle, stop itt. It has been said that the chief cause of unhappiness is trading what you want most for what you want now. If you are spending money you should be keeping to make your life better you’re causing your own future unhappiness.
If you have accrued debt and you’re stuck making payments that are over 20% of your income, you want to get that problem fixed as soon as possible, maybe you have to consolidate some loans and pay a fee to reduce your interest while you pay down some balances, maybe you just need to take some personal savings and pay off a creditor and then make the payments you had been making to yourself to replenish you savings. Maybe your situation is so bad you need to negotiate with your creditors to make it possible to make progress in paying off your debts. Many people don’t realize that you can negotiate with your creditors, but you can.
Having bad debt is not helping you, the sooner you can get rid of it, the better for you.
A lot of people call the money you keep available an “emergency fund” but emergency funds are for… well, emergencies. We like to call the money you keep available a “cash cushion”. A cash cushion can be used for emergencies if necessary, but they can also be used for opportunity and we want you to be looking for opportunities around you. Just because there is a recession going on does not mean that you have to participate in it.
A recession brings uncertainty, but taking proactive steps can help you have confidence and the courage to not only survive, but thrive no matter what the current economic situation may be.
Investing in real estate during a recession can be advantageous, provided you have the financial stability to manage it. Property values often decrease during economic downturns, creating opportunities to purchase real estate at lower prices.
If you have income and sufficient savings, buying property during a recession can lead to substantial long-term gains as property values recover. Additionally, rental properties can provide an income stream.
Recessions, while challenging, can present unique investment opportunities. During economic downturns, asset prices often drop, making stocks, bonds, and other investments more affordable. Savvy investors can take advantage of these lower prices to buy high-quality assets at a discount. This strategy, known as “buying the dip,” can lead to significant returns when the economy rebounds. It’s important to research and choose investments wisely.
Investing in equities aka: stocks, can be a smart move during a recession. While stock prices are likely to be volatile you can realize substantial returns as the market recovers. Diversifying your portfolio to include a mix of different sectors and industries can also help mitigate risk. This is not investment advice, it’s just an observation of what we have seen in the past.
The principle of “having money to make money” is particularly relevant during a recession. Having a cash reserve allows you to take advantage of investment opportunities that arise when markets are down. This could mean buying stocks, real estate, or other assets at reduced prices. Moreover, having liquidity gives you the flexibility to act quickly and decisively, which is crucial in a volatile economic environment. Building and maintaining a cash cushion ensures you can capitalize on these opportunities without jeopardizing your financial stability.
Patience is a virtue during a recession. Economic downturns can be prolonged, and it may take time for investments to recover. Avoid making impulsive decisions based on short-term market fluctuations. Instead, focus on your long-term financial goals. Historical data shows that markets generally recover over time, so patience can help you ride out the downturn and benefit from the eventual upturn. Staying calm and sticking to your investment strategy can lead to better outcomes in the long run.
Whole life insurance can be a valuable asset during a recession due to its ability to provide financial stability and liquidity when it is needed most. Here’s an in-depth look at how whole life insurance prepares you for economic downturns:
One of the key features of whole life insurance is that it accumulates cash value over time. This cash value grows at a guaranteed rate, and part of your premium payments contributes to this growth. During a recession, when other investments might lose value or become inaccessible, the cash value of your whole life insurance policy remains stable and can even continue to grow. This provides a financial cushion that you can rely on during tough economic times.
Whole life insurance policies allow you to borrow against the cash value or make withdrawals. This feature can be particularly useful during a recession when you might face unexpected financial challenges, such as job loss. Unlike traditional loans, borrowing against your whole life insurance policy doesn’t require a credit check. This access to liquidity can help you cover urgent expenses without having to sell other assets at a loss or take on high-interest debt.
In addition to the cash value, whole life insurance provides a guaranteed death benefit. This means that regardless of market conditions or economic downturns, your beneficiaries will receive a guaranteed amount upon your passing. The peace of mind that your loved ones will be financially protected even if the economy is struggling is priceless. A guaranteed death benefit can cover expenses such as mortgage payments, college tuition, and daily living costs.
Whole life insurance is known for its stability and reliability. Unlike investments that can be volatile during a recession, the value of a whole life insurance policy is not directly tied to the stock market or economic fluctuations. This makes it a safe and predictable component of your financial plan. Knowing that you have a stable asset to rely on can reduce stress and provide assurance even during difficult economic times.
Another advantage of whole life insurance is its ability to combat inflation. As the policy’s cash value grows over time, it can help counteract the eroding effects of inflation on your purchasing power. This is particularly important during a recession when inflation rates might be unpredictable.
Whole life insurance adds a layer of diversification to your financial portfolio. Diversification is a strategy for mitigating risk. By having whole life insurance as part of your overall financial plan, you are not solely reliant on the performance of the stock market or other investments. This balanced approach can enhance your financial resilience.
It is ideal to be ready for a storm before it hits, and a recession is like a storm. People who have had their whole life insurance policies established prior to this storm are likely to weather it better than people who haven’t done anything to prepare for a recession. At McFie insurance we have noticed that people tend to be more desperate to establish their whole life insurance during a recession, and that’s not a bad time to start, but the people whose policies were established even before the recession seem to have more peace of mind during a recession. If you need good life insurance contact us to schedule a strategy session.
Summary Provided By:
There's a lot of confusion around finance; there's so much to know and it's frustrating when you don't know enough to make the best financial decisions. I like to bring clarity to financial matters so people can make good financial decisions that will help them live wealthier more fulfilling lives.
Ben T. McFie
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