Recessions are horrible events for millions of Americans. They cause high employment, homelessness, and hunger. We need to ensure that we not only survive during these times but also prosper. If you dig deep into history, most fortunes were made during hard financial times. This is when you can buy property and businesses for pennies on the dollar. But to be able to buy these distressed properties and entities, you need to have the pennies. To prosper during a financial crisis you don’t start preparing during the financial crisis. The preparation starts during the bull market. We are currently in a bull market. This is the time when Wall Street is reaching all-time highs, housing prices are soaring, unemployment is low, and the outlook towards the future is bright.
No one can predict when the next bear market will occur. Bear markets are when the stock market is dropping over 20% from its all-time highs. Bear markets lead to recessions and financial crises. Since we do not know when the next bear market will occur, we have to always have a plan, and more importantly, always be executing that plan. Our goal is that when a bear market happens, we want to survive it comfortably, let the situation play out, and then start making long-term transactions that will help us build generational wealth. So let’s start with how to survive during a recession, then we will progress to how to prosper and build generational wealth.
To survive during a recession we need three things: a budget, multiple streams of income, and a plan.
A budget. Lucky for us we are already on our path to financial independence. That means we have a tight budget with our expenses already laid out. Things that get people in trouble during a recession are expensive liabilities. During a boom time (bull market) the money is flowing in. We use the money to buy expensive cars, boats, and other toys. Once a recession hits and those payments are no longer warranted, you have to sell these liabilities. However, since the market is now flooded with these expensive liabilities, you will have to sell for pennies on the dollar. And guess who is buying your liability for pennies on the dollar?
Multiple streams of income. Having one stream of income is extremely risky. Especially if your one stream is an earned income job. An earned income job is risky because you have no control over your income. Even if you keep your job, they can convert you to part-time, furlough you (no unemployment), or keep you on-call. These options suck, for lack of a better term. Having multiple streams of income can help alleviate this problem, especially if you have a scalable business, like selling cakes or jewelry. This is why having a social media presence is so important. Being able to create events with your social media audience is vital to making money in a recession. Let’s say you sell cakes on the weekends and you are furloughed from your job, so you have no income and no unemployment. You can make baked goods to sell at an event and make some income. Then you can use that same audience to start an in-home cooking business or “how-to-cook” course. Remember that seniors on social security will have income and lots of free time. You do not want to start building an audience during a recession. Some other streams of income are dividends, interests from bonds, and rental income.
A plan. This is how we leverage our budget and streams of income to survive the recession. Inside the plan are action steps for our worst-case scenario during a recession. The budget is our bare-minimum expenses if we need to cut to barebones. During a recession, we will assume that all our income streams are cut by 50%. We want to ensure that once we make these assumptions, we still have enough cash flow to cover our expenses. Also, we have contingency actions like use emergency funds, sell bonds, get a roommate, or yard sales. We have all of these things pre-planned so that nothing is a surprise.
Let’s do a scenario (I love doing these). During good times let’s say our barebones expenses are $3,000 a month. We have $6,000 earned income, $1,500 rental income, $1,500 dividends, and $1,000 business income. This is a total of $10,000 of income for the month. In preparation for a recession, we would assume that $5,000 of this income would disappear during the recession. We would still be pretty comfortable because of our low expenses and high income. This is the power of cash flow. And this segues nicely into our next topic, how to prosper during a recession.
As you can see from the above example, doing your due diligence, creating (and staying) on budget, building multiple streams of income, and organizing a plan would put us in a great position during a recession. Even in the worst-case scenario, we are still good to go. Chances are that the worst case does not happen and we will have most of, if not all, of our income. Let’s look across our 4 assets classes (cash, investments, real estate, and business) and see how we would leverage each to build our wealth.
Cash. During good times, we should be stockpiling some cash. I know everyone loves to invest in the stock market but also have some cash (or capital, dry powder) on hand for short-fuse buying opportunities. You can also keep cash in the form of bonds or CDs if you want to get a little bit of a return on your money. You will see why cash is important below.
Investments. Most people fear stock market drops, especially those that invest for capital gains. For those who invest for capital gains, all of their money comes from selling their securities (stocks). So if the price suddenly drops by 50%, they still try to lock in their gains, even at the reduced price level. For example, let’s say someone bought Telsa for $100. The price gets to $800 during good times. When a bear market hits and the price drops to $400, many capital gains investors sell, to lock in their $300 profit. For us prepared folks, this is a buying opportunity. If we feel that Telsa will get back to $800 at some point, we can jump in with our dry powder and wait for the rise in price.
Most of the time we buy dividend-paying stocks like McDonald’s. McDonald’s is one of my favorite stocks. If the price during a bear market is $230, and the dividend is $5, the dividend yield is 2.2%. Now during a bear market, the price may drop to $130, the dividend stays at $5, and the new dividend yield is 3.8%. This is a HUGE buying opportunity for us income investors. We should buy McDonald’s hand over fist. As you become long-term dividend investors you will recognize when your stocks go on discount, just like your favorite items on Amazon. Recession equals a sale on your favorites stocks, R.E.I.T.s, closed-end funds, and index funds. Get them while they are hot. You can make investments during recessions that can last a generation.
True story. I bought my kid’s first index funds on March 23, 2020. This was the lowest day of the stock market during the pandemic bear market. It was luck but putting yourself in a position to be lucky, is not lucky.
Real Estate. Real Estate is a little more tricky but you can still be prepared for anything. During the 2008 recession real estate tanked and lots of fortunes were made by those with access to cash money. During the 2020 pandemic recession, real estate went up in price. Those who already owned real estate were the big winners. So you don’t know which way the cards will fall. So how do you prepare? Ensure your credit score and credit report are amazing. You may need financing. Always keep a real estate agent as a friend. I read the www.biggerpocket.com blog every day for the latest trends.
Always talk to neighbors and let them know you are interested in buying their property if they sell. You never know what someone else is thinking or going through. In 2008, someone may be ready to lose their home and want to sell out of it. In 2020, someone may want to jump on the opportunity to sell at the height of the market. You want to be in a position to buy.
A good way to position yourself is to take out a loan if you think the market is going to take a dive. Remember to ensure your expenses don’t get out of control. Lending is very lax during good times and it contracts (tightens) during bad times. You may want to do a cash-out refinance, a home equity line of credit, or a personal loan in order to have a lump sum on the sidelines, ready to spend. I know it sounds scary to have out a loan, but if you are doing everything right, this should be a drop in the bucket of your cash flow. Remember, you are trying to ensure that you have a 20% down payment on standby if there is a buying opportunity.
You can also have good friends and family on standby with cash in hand. I currently have one friend, who I have known for almost 20 years, who has cash in hand for real estate investments. If something juicy comes up, we can pounce. Ensure you learn about incorporating your businesses and writing contracts, so friendships aren’t ruined. The key takeaway is that you don’t know which way the coin will fall for real estate during a recession. Be prepared with a large cash down payment, great credit, and a real estate agent. And with all this in place, I promise you’ll get “lucky.”
Business. This may be a tricky one for most of us. Right now, during a good time, we need to start learning about business. Owning a business is the gateway to generational wealth. I’ll tackle this in two ways; one way is to grow our business during a recession and the other way is to buy a business during a recession.
If we have a social media presence, it will be infinitely easier to grow a business during a recession. When people have jobs, they are content. When their jobs go away, they then want to start improving their skills, saving money, and diversifying income. So if I have a website, books, programs, courses, and mentoring on how to improve skills, save money, and diversify income, your business will be a winner. During the good times, set the stage for the bad times. Produce as many products as you can. Ensure that they fill a need and help others. They need to provide value. Whatever your business is, have a social media and content creation strategy behind it. For example, if you garden and sell fruits and vegetables, ensure you have YouTube, Facebook group, and a blog on how to start a garden. If the world goes to crap, people may want to learn how to garden. Start this now, right now.
Having an online presence also allows us to scale our business to meet new needs. If your community is doing badly during a recession, you may want to organize a food drive or yard sale that donates the proceeds to the community. This not only helps the community but helps you build your brand recognition. When times improve people will remember you and your company. Be a good steward.
Buying a business is tricky, but you also need to have a vision. Having your social media group will allow you to see things from a new perspective. For example, gyms were hit particularly hard during the 2020 recession. You could buy gym space for pennies on the dollar. But just because you buy a gym doesn’t mean that that is the only function this venue can serve. With a social media presence, what other events can a gym service? When you have a bigger picture of the world, you can control the outcome. Let’s say I had 10,000 members in my Facebook Group, 200 in my local White Sands, Florida area. I could organize a get-together, at my gym, where we work out together and socialize. We could then have a food truck come in and we could enjoy food and add all our calories back (lol). If I had 40 people show up, at $10 a person, plus the food truck gave me 10% of its profits, I could make a nice sum of money. If I did an event like this twice a month, plus my other monthly subscriptions, I would probably be doing pretty well. That’s why social media (and thinking outside the box) is so vital to a thriving business. Just like individuals, businesses need multiple streams of income as well.
Recessions are bad for most people. Even those who keep their jobs are still living in fear. We want to be above the fear factor. During good times, we need to stay on budget and prevent lifestyle inflation. We always need to have a plan on how to generate income in a hurry. This may be renting rooms, selling food, or renting a car on Turo. We need to have a lump sum of cash on the sidelines, waiting to invest in real estate, the stock market or a business. Financial education, including how to start and run a business, entrepreneurial mindset, how to finance and run real estate, how to invest in dividend-paying stocks, sales, marketing, and community relationships are vital. We want to be steady, consistent, and intentional during a recession. Calm, cool, collected, and ready for any opportunity that comes up. You’ll find that once you are positioned financially, and intelligently, you will seem to always get “lucky.”
I know this is a long article, I am just very passionate about financial independence. However, one last story. My wife and I HATE living in suburban neighborhoods. Our first home was on 3 acres. When we bought our second home, we were in a suburb. Right across the neighborhood were houses that were on 3 acres of quiet, park quality land. We would drive through this neighborhood almost once a month. Once we started our financial journey in June 2019, our outlook became more future-focused. In January 2020, about 7 months after starting our journey, a completely renovated home in the neighborhood, on 3 acres, opened up. We were just randomly driving by that Saturday morning. We had an offer in the next day. It was expensive for Florida, but when we walked inside, we realized that it had two amazing master suites we knew could leverage. Now, we rent the two master out to elderly individuals, and we are paying only $150 a month for the house of our dreams. We got “lucky”.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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