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):
http://dropdeadmoney.com/join/wp-content/uploads/2012/05/US-Economy-1948-2012-b.jpg
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.
Always.
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.
Great information! Being out of debt really is the best way to prepare.
Getting out of debt is the first thing we need to do before we can get really prepared for recessions.
No question: getting out of debt is step one. There is one and only one reason for bankruptcy: debt. (By definition.)
Oh by the way, nice to know I’m not the only one called cheap!
all the things you mentioned, one should do regardless of the potential of another recession or not. worrying about and preparing for worst case leaves us better of in any situation.
luck is when preparation meets opportunity. ive multiplied my net worth several times over in this last recession. having cash to invest when investments presented themselves during the economic nosedive has paid off handsomely.
And THAT is the key: having “dry powder” to pick up the bargains every recession presents. No debt is the start, but the sweet spot comes when you have that extra cash. Like they say: cash is king, and at no time is it more true than in a recession!
William,
Great post! I’ve been debt-free for seven years now, and it’s the best thing I ever did for myself. No debt = Freedom. It’s a beautiful thing.
Deonne
That kind of freedom is priceless.
Equally priceless is the identity shift as we go from debtor to investor. That’s something not a lot of people talk about, but it is profound.
Until you’ve felt it, it’s impossible to imagine it.
This is all great advice! Right now we are aggressively paying off debt.
From my favorite movie, Empire Records: Lucas: In the immortal words of The Doors, ‘The time to hesitate is through.’
You’re so right — I see really good real estate deals, but they’re only good deals for people who have actual cash to spend on them. I’ll be ready, come the next recession!
I’ve never really thought about it in that way and I’m glad you posted about it! I know that the economy goes in cycles but you should definitely prepare ahead of time for when you know that eventually times are going to end up being rough again.
Great reminder to “put some away for a rainy day.”
Yes, Lance. I’m over 60 and I continue to be surprised at how many people in our age bracket have still not figured out that we get recessions on an amazingly regular schedule. One can understand someone younger who just went through one for the first time thinking this is a bad, but random, experience.
That one piece of information, that recessions are inevitable and even regular, is what turned my corner. Forewarned is forearmed.
Here’s a question for y’all: Straight money says it’s wise to sell your own home when the market peaks again and buy back another house, similar or better, for less later. Eben though we know this, we couldn’t bring ourselves to do it. For one thing, the market in Denver never really got that crazy, but the thought of moving twice in about three years is not one that jumps up and grabs you with its appeal.
So here’s the question: if you know or suspect you can realize a gain of say $50-100,000 by selling your dwelling and buying it back again, would you do it? The money is real, but so is the hassle (times two).
Would you do it?
Things do go in cycles it seems. One thing to keep in mind: economic good times don’t go on indefinitely. When things are good, it’s time to squirrel away money for the lean times and protect your cash flow (particularly though your career). Do it right, and you can make it though tough conditions.
william,
we are just about to sell our home,which we have lived in for almost 3 years. gain should be 300k. the next home we are moving into, we are presently building. gain should be 500k. both transactions are tax fee because we will live in the homes for longer than 2 years to satisfy irs requirement for personal home exception. luckily, i have a wife who understands. but 800k+ tax free, i am cool moving 3 times in 5 years…
I’d like to add to build up at least a 6 month emergency fund (If you have two incomes, you could go less than that). Also, don’t stop there. Keep saving and investing for the future. Try to pay off your mortgage early or buy a house with more than 20% down. Being overly prepared for a financial emergency will ensure that you’re well taken care of when “life” hits. Like Crystal said, it will happen again. It’s just a matter of when.
I think some of the problems with American’s is that they don’t see what is coming, but rather live comfortably when they do have money, and put the possibility of an upcoming recession out of mind. This inevitably leads to debt. But to remember that recessions are cyclical and inevitable will force those who think they don’t need to worry about it, to rethink the money they are spending when the economy is actually doing well.
Yes, economic dips are periodic, but how they affect various people differs greatly. Diversifying is good advice too. Sometimes things happen as they did historically, sometimes new things pop up, so be adaptable. If possible, use your company’s savings system and roll out of the stock market when its been hot a while and back in when a dip occurs. Corporate savings make more than 0% interest, last dip, the big accounts were paying up to 5%. ( I know, only some employers offer employees more than one option of how to invest their money, but ours did [there's like 8 options, from company stock only, mix of stocks, mix of stocks and CD's, to CD's, bank deposits and corporate loans, you can move around percentages of your savings to various "vehicles"] and it helped a lot). Buying dividend stocks also is an option, without the tax side affects of buying and selling all the time. Diversify for the long haul. Lil real estate, lil stocks, some interest bearing stocks, bank deposits, no debt; then throw in a whole bunch of self reliance and perseverance.
We live where hurricanes are annual threat, but generally only cause havoc every 8 years. We still prepare every year. We also live in a farming community in which crops are grown year round, because with the on again off again drought conditions, winter crops sometimes do better than the summer ones. Big fall crop this last year was hay, because ranchers had to sell off their livestock due to lack of local hay and feed. Gas prices made trucking it in too expensive. Tax laws what they are, farmers and ranchers have to try to grow something every two years, drought or no drought. So, for now, there really is very little locally grown human food. If a storm hits, we will be cut off from food again (it has happened before). Weird how various things affect other stuff and ends up affecting you. You can’t prepare for everything. Adapting, keeping a watch on things, preparing,and persevering will all see you through the rough times as well as the good times.
Investlike1%, you may get a 800K tax gain IF you sell at the prices you are foretelling, but the 800 K has to go either into another tax free investment or your next home, or you will be paying tax on it at even a higher rate in a few years. Also, if you used the 300K to make the 500K, you are only realizing 200K profit? Your figures would also have to include any financing and fees you paid, in order to be real. We paid off our first house in 1990, moved to our present house in 1992, paid it off in 1999, while still renting out the first house. The amount we actually paid for the houses with mortgage interest minus what the appraisal district says they are worth and closing costs deducted, we will make about 50K on each of the houses. Same money in our stock investments have earned us over 100x as much in the same amount of time, and since we haven’t been moving the money from stock to stock, we haven’t paid any taxes on it either. We are now thinking of retiring for the 2nd time, so we may actually cash in some of the stock, but probably we will take a low interest equity loan, and leave it in there (we still have 2 college kids). Real estate bets seem more precarious to me than stock buys, lol. I have lost 200K in the market, then gained 500 K the same year. My house never gives me the sense I will be able to get the same returns from it as from investing in the market, not where my husband works at any rate. His work benefits actually bring in more than $800K worth of security, sanity, and earnings in three years in my book, and he doesn’t make but 5 figures/year. End up in the hospital without his benefits, we would be doomed. We are in the process of turning a rental into an owner finance sell, because we feel we are too old to mess with keeping up a rental unit or an aging house. As you age, you see the sense in down sizing, easier on the back, easier on the mind. To realize the huge profits in housing you have to put in sweat equity and be able to ride out the dips in that market, which I believe, can last much longer.
That being said, we are looking to move into a new construction house of our own, just haven’t found the perfect place yet. Maybe we should go look in Crystal’s neighborhood …sure she would appreciate such credit worthy neighbors, lol.
Kelly, I think you hit the nail on the head: about the only thing we know for sure is that debt is a killer.
Retired, you’re right – diversifying into various investment vehicles is a good thing. However, I’ve found that to do well in any one, you need to know more than the average person. From that point of view, focusing on what you know might yield better returns in the long run. If you’re a handyman type, rental properties might do better, if you’re a numbers geek, the stock market may work better. In our house, my wife is the handyman (blush) so I focus on stocks, where we’ve definitely made more money than real estate could have. But I know a guy in California who accumulated rental properties over the years, and over a long period he’s probably done better than me.
In the end, we spend most time on what we enjoy – and I’ve observed that where we spend most of our time, we do best.
[...] following is another guest post from William at Drop Dead Money. He also contributed Now Is the Time To Prepare and has become a regular commenter here at [...]
[...] following is another guest post from William at Drop Dead Money. He also contributed Now Is the Time To Prepare and Honey, How Can It Hurt Just To Take a Look? He is a regular reader and commenter here at [...]