The Sky is Falling! Quitting Your Job During a Recession

Coming to a street corner near you!

“Plan for the future, that’s where you’re going to be spending the rest of your life.”

Mark Twain

A recession is coming. Depending on who you listen to, it’ll be here by election day or sometime in 2020. It was also supposed to be here already this year. Or was it 2017? Wait, maybe it was 2015. Remember when they were calling for recession in 2012, just 4 years after the Great Recession? Every year economists or newspapers warn of the ‘coming recession’ that lies just over the horizon.

After seven years of calling it wrong you’d think they’d give it a break. But they won’t — sells too many newspapers.

The point is, recessions do come around every so often. They’re a side effect of the business cycle. Borrowing and lending go too far and there’s a snap back. Economic repercussions usually include decreased spending, higher unemployment, tight credit or banks not lending.

So what to do if you’re looking to Quit Your Job or have already broken free?

The average person might fear recessions. They are, after all, times of great uncertainty. As someone in control of their finances, you should be excited at the opportunity that has presented itself. Prices fall in times of recession. Credit dries up, which leads to people spending less money (either because they don’t have it or would rather save or pay down debt), which leads to less sales and more inventory. The law of Supply and Demand tips the other way: demand drops and supply is more available, which brings down the price. In other words, things get cheaper because no one is buying anything.

The stock market becomes a super market sweep. When credit dries up, loans get called. This includes margin calls, where people and institutions that have borrowed money from brokerages to buy stocks and bonds are required to pay back the brokerage. Imagine you went ‘on margin’ in your E-Trade account, borrowing $10,000 and bought a bunch of Apple stock — the economy just dipped and AAPL stock is falling. E-Trade knows you borrowed money to buy a stock that’s losing value; they call the margin loan and you owe them $10,000 immediately. You have to sell your AAPL stock (likely other shares as well to make up the difference in value lost as AAPL stock fell). It’s not just you — hundreds of thousands of other people are being margin called by their brokerages and forced to sell.

If you’ve got cash, now is the time to buy. Over-leveraged (i.e., “bought with borrowed money”) investors have to dump. The stock market falls. Institutions like pension funds and hedge funds panic at the accelerating drop in prices so they sell stocks and buy bonds (generally regarded as safe havens during economic downturns). Them selling accelerates the stock market drop further. If you’ve got a rainy day fund of cash, you can swoop in and buy stocks cheap. When the recession ends and pensions and hedge funds move back into stocks, the prices go back up because they’re being bought. Something else to remember: a lot of stocks (particularly REITs) still pay dividends during recession. You can bolster your dividend ladder pretty well in a recession, adding to your portfolio of cash-paying stocks. Yes, your own stocks you were holding prior to the recession will likely take a hit, but will also likely keep paying dividends. REIT (Real Estate Investment Trusts) absolutely will.

Speaking of real estate, that also becomes another buying opportunity. The 2008 crash is a great example of this. Historically, real estate has always been regarded as a ‘safe investment,’ meaning value holds even during recession. However, recessions usually result in more inventory available in real estate. People who have unaffordable mortgages, suffer job loss, or end up moving due to economic downturn will either sell off their home or allow the bank to foreclose. Commercial property becomes widely available as sales dry up and force business to close or relocate. The more property that’s available, the lower the price goes. Again, law of supply and demand.

Recently, I read an amazing book called The Great Depression: A Diary (which I’m going to do a Required Reading post on), which is a published diary kept by a lawyer during the Great Depression of the 1930s. Throughout the entries over the years, the author bemoaned the fact that if he only had some cash he could buy up swaths of stocks, land, or businesses as they were going for pennies on the dollar.

Having cash when recession hits can set you up for massive future gains. As the old contrarian maxim goes, “buy when there’s blood in the streets.” It may be a bit melodramatic for this post, but the point is to buy when things look the worst.

So who is really at risk when recession time comes?

Employees, for one, at put at risk. If a company is forced to downsize or cut costs, labor is usually one of the first things to go (as it is usually the greatest expense). If you’re working a job and living paycheck to paycheck, you are the greatest at-risk. Loss of even a single paycheck will disrupt everything. Remember how hard employment spiked over the course of 2008?

Indebted people are another group at risk. Debt servicing becomes difficult if income drops or vanishes altogether. In some cases, banks can call a loan (like a mortgage) in the event of non-payment for a previously specified amount of time. Credit cards and personal loans will pile on interest and service fees for non-payment or late payments. Worse, if your income has dropped or you’re living on savings, huge chunks of your monthly income must redirect to debt, leaving you with less for other things. You might even be forced to sell things you don’t want to sell to satisfy debt payments.

Lastly, your business might be at risk. If you’ve read my blog in the past, you know I’m a fan of MJ DeMarco’s The Millionaire Fastlane and DeMarco’s advice of not starting a business based on what you love. You’re setting yourself up to fail if businesses aren’t founded on need. Businesses based on love — yoga studios or frozen yogurt shops — will be obliterated with the next recession. Thousands of etsy shops will close down. Endless side hustles will dry up. Why? Because as credit freezes and people lose their jobs and/or panic, spending vanishes. Subscriptions and memberships are cancelled. Penny pinching goes into overdrive — and these businesses will wither and die.

If, however, you founded your business based on market need, if you’re providing a valuable or even critical service or product, your business can survive. For some businesses, recession brings a boost. Bars and thrift stores thrive. The movie theater had its golden age during the Great Depression as people went to movies looking for escape and during the economic downturn of the 1970s, the Hollywood blockbuster was born. If your business is essential, it can weather the storm.

Back to the Mark Twain quote above. How can you prepare for the next recession if you’re planning to Quit Your Job?

The first one is easy, because you should have been doing it anyway to Quit Your Job: reduce debt. Pay down credit cards, pay off your car or student loan. Reduce your liability, the number of monthly payments, and the amount you need every month to meet bills.

The next best way to prepare is to have cash. Cash is your sword and your shield. You should have an emergency fund ready to cover several months of normal expenses. This will help bridge the gap and not disrupt your life should income drop or cut off altogether. In addition, having cash allows you to pick up assets at severe discount — buying stocks or property that will eventually regain in price. Just as a fun example, take Patrick Industries (ticker: PATK) company profile:

It manufactures and fabricates decorative vinyl and paper laminated panels; fabricated aluminum products; wrapped vinyl, paper, and hardwood profile moldings; solid surface, granite, and quartz countertops; cabinet doors and components; hardwood furniture; fiberglass bath and shower surrounds and fixtures; softwoods lumber; simulated wood and stone products; and others.

After the housing crash in 2008, the stock cratered to 28 cents per share. It’s obvious to see why, given its significance to home renovation and construction. From the low in March 2009 to the end of 2017, PATK gained over 24,000% in stock value. This is an extreme example, sure, but it illustrates how buying up something so unwanted could great gains in the future.

There’s a reason they say “cash is king,” and it has its roots in the Great Depression. At a time when everyone is selling assets to get cash, having cash makes your royalty.

If you want to learn more about setting yourself up to thrive in the next recession, check out some books like Recession-Proof by Jason Schenker or Recession-Proof Living by Bill Weise.

5 Ways to Build Your Savings Fast

Savings is a key component of having a healthy lifestyle. Having savings means not worrying about the “what ifs” — What if the car breaks down? What if I need a new roof on my house?

It also means having money when opportunity appears — whether to take that vacation or invest in a startup idea. Having money waiting in the wings gives you freedom.

#1. Pay Yourself First

If you take away anything from this post, let it be this one. I saw my savings grow exponentially when I started paying myself first. The idea comes from the book The Richest Man in Babylon, a book of financial advice told through parables: take 10% of what you earn for yourself.

This means save 10% of everything you make BEFORE bills, expenditures, and anything else in your budget. If your paycheck is $1,000 you save $100 before anything else. The $100 goes in to savings, and you have $900 to spend on bills, entertainment, etc. If you do nothing else to save, you’ll have tucked away quite a bit in a year. I love this rule and I follow it every time I get paid or make money.

The psychological effect of this is huge. I know what it feels like to get a paycheck and it’s gone. You feel like you’re not getting anywhere, you work for bills. When you pay yourself 10% first, it gives a sense of accomplishment and more importantly — worth.

#2. Keep the Change

No 8,000-year-old Babylonian wisdom here; I came up with this one myself. When I began my financial transformation, I started using a budget to keep track of spending. I would estimate my next paycheck (I was wage plus commission, so no two paychecks were ever the same), determine what bills must be paid during those two weeks, and determine what I could spend. I always gave myself a $100 buffer from each paycheck — this gave me breathing room so I wouldn’t fret about every penny plus if a friend wanted to grab lunch or something small caught my eye, it came out of the $100 buffer.

That way, I wasn’t living like a monk every two weeks.

But I rarely spent the full $100. Sometimes there was a dollar left, sometimes much more. When the next payday came, I would take whatever was left in my checking account and move it into savings. By sweeping up the leftovers, it would eventually build up in my savings account. $10 may not sound like much, but when you put it into savings every two weeks, before long you’ve got $100s in there.

#3. The Waiting Game

A big part of building wealth is knowing yourself. That means knowing your (bad) habits, like for me impulse purchases was something that got me into trouble. It plagued me throughout my 20s, and helped run up big balances on my credit cards. Amazon made it easy to get anything in two days and it was so easy to put things in the cart and hit “buy now.”

I knew my weakness. I knew how I behaved. So I made myself institute a waiting period on Amazon purchases. Any thing I add to my cart I wait three days to buy. What happens in three days? The impulse dies away. I forget about stuff I put in there. When I go back in, a lot of times I’ll delete things or move them to “save for later.” I have literally hundreds and hundreds of items “saved for later” in my Amazon account…but I didn’t buy them. It’s money well not-spent.

It’s an added bonus that sometimes Amazon will lower the price of things in your cart to draw you back to buying! So if there is something you plan to buy, Amazon might put it on sale to get you to pull the trigger.

#4. Think on a Full Stomach

This may sound dumb, but going to the grocery store hungry will cost you a fortune. I noticed a big difference in grocery bills just by going after a meal instead of before. I mean, it makes sense, right? But it’s one of those things you never think about. I certainly didn’t, but I was looking at my own habits to find out where I could cut down on spending, I started to study my grocery shopping.

If you’re hungry when you push the cart down the aisle, EVERYTHING looks good. You’re shoveling extra snacks into the cart. Fantasizing about giant meals you’re going to make — all of which need massive amounts of ingredients. By the time you get to check out, you’ve blown up the budget.

If you’re full, however, you don’t really want to think about food. You just want to get out of there. Get what you need and get out. It’s much easier on your cart – and your wallet.

#5. Separate Your Savings

If you haven’t caught on by now, each of these things has a psychological component. “Save more, spend less” is really just a mind game. You have to know yourself, how you are, and what you can do to beat yourself to the punch.

I recommend separating your savings from all your other money. Make it hurt to draw from it. When I first started saving, my first $1,000 was in cash. Why? Because cash feels real. You have it in your hands instead of seeing a number on a computer screen. You don’t want to part with it. I also kept it in $100s, because I didn’t want to break any of those nice, big bills.

When it was time to move to an actual savings account, I opened up a savings account with the same bank as my checking. It was easy to funnel money back and forth. So easy, in fact, the savings account became an account for several things (like where to put aside my tax withholdings). It got so convoluted I didn’t know what my actual savings were — what was savings and what was meant for taxes? How much of it was set aside for an upcoming big purchase? Money was coming and going, and my savings was getting caught up in it.

I finally got my savings its own account, isolated from everything else. I have a nice, easy number to look at and know “that’s how much I have saved.”

See, it’s all psychology.