No Dancing Allowed

Last night after three hours of Shondaland I hopped onto my laptop and fell down a personal finance rabbit hole. It started with the latest post on Bitches Get Riches and ended when I fell asleep reading about price/earnings ratios on Investopia while watching the Big Short on Netflix. How did I go from reading an essay about diversity and inclusion in the personal finance community to reliving the 2008 housing meltdown? Well, I wandered from the Bitches to the bro-iest of bro’s site and read the grim prediction of an impending recession.

Normally the thought of an economic downturn elicits panic and dread. But in the Financial Independence/Retire Early region of personal finance talk of recession tends to spark a different mood.

Why? Because when you’ve saved 50% or more of your income for the last five to ten years that means you’ll have plenty of money to go shopping invest when the world is on sale stock and real estate values drop. So if you remember the last recession back in 2008, then these are the people who bought the house for which you paid $150,000 for $90,000 in cash. To be clear I was the person who’s home got bought.

While I love a good deal, I just cannot join in these people’s exuberance at the prospect of a recession. Personally, I have weathered previous bust cycles just fine. Yes, my modest investments took a hit and my home value plummeted but I did not suffer any job loss or reduction in salary so my everyday life was unaffected. Even though I was doing ok many around me were not. I lived in Michigan back in 2007 when the auto industry imploded. When a state’s economy is inextricably tied to one industry nothing good can come of that industry’s failure. My next door neighbor lost his job and eventually his family’s home. My 3 bedroom house became a cheap boarding option for several friends who found themselves out of work. Although I was relatively well paid at the time, I was also stuck in a job that I hated because I was upside down on my mortgage without enough cash to make up the difference.

Although I am on the verge of (f)unemployment, I am in a much better financial position today than I was in 2008. But a higher net worth doesn’t erase the memory of seeing businesses closing and foreclosures increasing. Towards the end of the movie The Big Short Brad Pitt’s character Ben Rickert (a former investor who’s gone crunchy with age) takes baby hedge fund managers Jamie and Charlie to Vegas for some type of securities conference. While there they realize that if the subprime mortgage bonds fail so will the prime mortgage ones. Long story short they bet long odds on the inevitable events that no one else thinks will happen. Being young and loving money, Jamie and Charlie are happier than Rick James with hookers and blow at the prospect of the millions and millions and millions (just keep saying “and millions”) that they will make when the U.S. housing market collapses. And that is when Ben has to give them a wake up call.

If a recession hit in the next two years I could buy a rental property dirt cheap. I could feasibly add Amazon, Google, Tesla, and a host of other companies to my stock portfolio. I could stand to gain bigly, but I just can’t fucking dance.

The 2008 recession wiped out more than half of Black America’s wealth. As White Americans have started to regain the 16% of wealth they lost between 2005 and 2009, Black families were actually losing wealth for three years before the recession hit and have continued to do so once it “ended.” Although it is said that the economy has recovered from the Great Recession that recovery is plagued by inequality, as two-thirds of the increase in aggregate household wealth is due to rising stock prices. Black families lost 35% of retirement savings between 2007-2009, as many took withdrawals to stay afloat, thus missing out on the gains of the recovery bull market. Even the rebound in home prices is uneven.  Since reporting their highest home values in 2007 respondents to the Survey of Consumer Finances reported that by 2013 median home values for Black Americans had fallen by 37.7% (compare that to 20.3% for Whites and 25.8% for Hispanics). In 2007 home equity accounted for 77% of Black families’ wealth, compared to 62% for white families, thus making the plunge in home prices devastating for the community’s net worth. Making recovery that much slower for Black Americans are the loss of more than a half million public sector jobs (Black people are 30% more likely to join the public sector workforce and more than 20% of Black workers are public employees), an unemployment rate twice that of white Americans, and nearly a decade of stagnant wages. Economic downturns have always affected the Black community earlier, harder, and longer.

By all measures this recovery has been slow to reach middle America. Since many are just now starting to see their financial picture improve, why are people already predicting another recession? Well first off, it’s inevitable. Economies cycle through periods of boom and bust. Since The Great Depression of 1929-1933 there have been thirteen additional downturns lasting anywhere from 8-18 months. Booms have lasted no more than ten years at a time and we’re currently sitting at year 8 of the current cycle. We are coming due. What will be the cause? Fuck if I know. It could be the collapse of the bond market due to prolonged low interest rates. The higher education bubble could burst. Soaring PE ratios could crash back down to earth (I’m looking at you Amazon).

Glad that you asked.

Five Ways to Prepare for the Next Recession

Regardless of the what it’s even more important to be ready for the when. Now is the time to strengthen your financial house to be able to withstand as much of the storm as possible. Here’s how:

1. Widen the gap between earnings and spending. It’s preferable to earn more and spend less. However even doing one of the two is a good look. This isn’t a cure for poverty, but for middle income earners it’s the foundation for personal finance. When it comes to the expenditure column every dollar saved counts, but I recommend tackling the big rocks that save more money with less overall effort. That means lowering overhead expenses like housing, transportation, food, and energy. An old friend recently shared with me that he’s moving his family of five to a slightly smaller place to cut his rent by hundreds each month. Moving may suck big, hairy moose balls but an extra few thousand dollars every year makes it easier to swallow. If you’re looking to make more money the best way to do that is to negotiate a higher salary or cultivate multiple streams of income. I highly recommend listening to the Paychecks and Balances podcast for the top notch career advice.
2. Pay off your debt. I came up with a new rule today. It goes like this, no new discretionary spending without positive net worth. Too often extra funds are allocated to creating one more bill. It’s one thing to add that $80 a month fitness club donation if you have enough assets to pay off everybody you owe and still have something for yourself. But if that isn’t yet your situation, then getting rid of the debt should be the number one priority for any new money that comes from Step 1.
3. Save six months of living expenses. Do not touch it. In a recession cash is king. The more you have the better off you will be. My advice for saving more is to first give yourself a raise by ensuring you’re not having too much money withheld from regular paychecks. Next hide your money from yourself. Trying to save what’s left after spending is a recipe for not saving at all. I don’t let my savings even touch my primary checking account. It is direct deposited into an out of state bank account for which I don’t have a debit card. Even if you’re already breaking even with the IRS and you have yet to make any extra income I still recommend siphoning money off the top for savings. Yeah, you’ll feel the missing money initially, but it won’t take long for your spending habits to adjust.
4. Carefully consider major purchases like homes and cars. First, in 99% of cases buying a primary residence is not an investment. After interest, maintenance, utilities, and major repairs, over the course of 30 years a $300,000 home can cost close to $1MM. Investments are what you purchase with money with the expectation that it will generate money. Unless you’re monetizing your home it’s best to consider it an expense. That is not to say homeownership should be avoided. I’m no hypocrite. However, it would be a good idea to spend much less than your approval, shop around for the lowest rate, and have a three month cash reserve after closing. If being a homeowner is a near term goal it might behoove you to go the house hacking route and let other people help partially (or even fully) cover your mortgage. As for buying a car or a boat or other big ticket item I’d advise paying cash so as not to add years of payments to your monthly expenses.
5. Diversify your investments. One of the reasons why the Great Recession decimated Black wealth was because the little wealth possessed was concentrated in one asset. Spread the wealth (pun intended) across cash, stocks, bonds, real estate, and other investments. If one or two take a hit while the economy is down the others can pick up the slack until things turn around.

So what’s my plan for an impending downturn? Je ne sais pas. Although (f)unemployment is looming in less than two weeks I expect that I will be able to replace my income by the middle of 2018 so that I can continue to save cash and invest in the stock market through both taxable and tax advantaged accounts. I’d also like to invest in real estate by picking up a rental property to bring in extra income. I’ll also strongly consider knocking out my student loan sooner rather than later, low interest rate be damned. To be honest, I’m not too concerned about myself. I was in college during the 2001 recession and graduated in 2002 with a job at a Fortune 500. The 2008 recession was more nuisance than catastrophe for me. Call me flippant, but past experience makes me sure that I will be fine. My concern is for my loved ones. In 2008 $280B in pension assets were lost. My senior citizen parents live off their pensions. Between December 2007 and early 2010 8.7 million jobs were lost. Both of my siblings have tremendous student loan debt and neither can afford a job loss. My hope is that the current growth cycle, as slow and uneven as it may be, will keep going for another year or two. People are just starting to recover from 2008. Hell some, are still trying to get back to even from the 2001 recession. Another recession would flush away the little bit of progress many have made. While it’s nice to be in a position where recession = opportunity and I encourage anyone who can to scoop up assets at bargain basement prices, I must insist on one thing.

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