The following is a guest post from William at Drop Dead Money. He is new to the online personal finance blog world, but has been reading BFS for a little while now, and is wise in the ways of personal finance thanks to his own experiences. He is also thinking about starting an actual blog, so please leave comments below to help push his butt into gear!
Did you, or anyone you know, suffer in the last recession? You’re not alone. We’ve all seen the headlines and statistics about foreclosures and bankruptcy.
Fortunately, the worst is over and the country is in a recovery now. Some people disagree, but there are just too many indicators to ignore. More people have jobs and airline seating, miles flown, and hotel bookings are up. So are nonresidential construction, corporate revenues, and manufacturing indices.
That’s nice. So why talk about recession again?
Because Recessions are Inevitable
Just take a look at this chart (the dates show the bottom of each recession):
The conclusion is inescapable: we have a recession every 7-10 years. Recessions are not only inevitable, they’re to some degree predictable. The last recession bottomed out in 2009, almost three years ago now.
Do the math, we’re not that far from the next one any more.
What causes people to get caught in a recession?
In one word: unpreparedness. When a hurricane hits, you have no time to prepare. If you know a month in advance, you have enough time to prepare. You can’t stop it, but you can limit the damage.
Same with recession: you can’t stop it from coming, but you can prepare. Forewarned is forearmed.
How do you prepare?
1. Get Out of Debt
Think about it, what is the number one cause of bankruptcy? Debt. If you have no debt, you can’t go bankrupt. Same with foreclosure.
So the number 1 thing to do to prepare for the recession is get out of debt.
2. Pay Attention to Timing
Buying a house is a good decision, right? Buying a house at the top of the market, though… well, that’s not so good. When you buy can make or break your decision.
So how do you know when to buy or not to buy? See the economic cycle in the chart above? Each cycle has four phases. These phases closely correspond to the seasons of a year.
A farmer plants in spring, but not in fall. In the economic cycle, the best time to buy is in the spring/early summer phase. Once we’re in the full swing of summer, prices have begun climbing, and it becomes less and less prudent to buy.
Every economic cycle has a fall season that follows summer. The talking heads on television say “the economy is overheating.” The number one characteristic of the fall is rising prices. That’s when “bubbles” appear. (Remember the housing bubble a few years ago?)
Bubbles mean high prices. As in, “sell, don’t buy.” This is the time to sell anything and everything you have. Rental houses, stocks, anything you own that you don’t eat, wear or drive. In a few years, you can buy these things back at a serious discount, because the fall (bubble season) is always followed by a recession.
And recession season is shopping season. After you sold everything in the fall, you put it all into an old fashioned savings account. That’s right, the kind that pays no interest. Because you know, when the recession rolls around, cash is king.
Recession (and I’m sure you remember this) is when prices are at their lowest. Warren Buffett says the key to getting rich is buy low, sell high. Recession is “buy low” time. And the key to buying low is to enter the recession with cash in the bank, as much as you can lay your hands on.
3. Pick Your Job With Care
We’re in mid-2012, and the U.S.economy is in the late spring/early summer phase of the economic cycle. It’s a good time to ask the question: just how recession proof is my employer? Or business? It’s no secret that construction is pretty vulnerable to recession. Don’t look for a job with a construction company.
If you’re looking for a job with a big company, take a look at their balance sheet. How much debt do they have? Google Finance is an easy and good source of information. The key number you look for is the debt/equity ratio. That’s like your house: you add up the debt and divide it by your equity. A ratio of 1 means the company has just as much debt as equity. Lower is better and 1 is a rule of thumb maximum. I’d personally feel nervous if my employer had a debt/equity ratio of more than 0.5, but there are no hard and fast rules.
The point is to pay attention to more than how much they will pay you. Also look at their layoff history in the past.
And time the job change right. The earlier in the economic cycle you make the change, the more seniority you have by the time the next (inevitable) recession arrives.
Do It Now!
If you’re like most people, your first reaction is: c’mon, the next recession is still years away! That’s right. But… you never know when it will come, and preparation is not an overnight thing. And when the recession comes, it’s too late.
Now is the time to start preparing.
There is a recession in your future, guaranteed. That’s the bad news. The good news is with preparation, you can not only avoid the carnage, you can turn the recession into a terrific shopping opportunity, to help you build what many call Drop Dead Money. (See the Urban Dictionary explanation for Drop Dead Money here.)
We all want Drop Dead Money, don’t we? We’ve just never called it that. Some people call it their freedom fund. Whatever you call it, recessions offer you some of the best opportunities to boost your net worth, freedom fund, drop dead money, whatever you want to call it.
There is a lot more to preparing for the next recession, but the three suggestions above are good places to start. Have fun!
Crystal’s Comments: I think this advice is spot on. I think it truly pays off to be prepared. It also pays off to sell while you are up and buy when things cost the least. No one can perfectly time the market, but it is obvious that things are on sale right now. When things start being priced at way more than you bought them for, that is probably a great time to sell. Just do what feels comfortable and avoid being hit so hard during the next recession.