how to get ready for the next recession

How to prepare for the next recession

It is wise to learn how to prepare for the next recession for peace of mind and security. We owe it to ourselves and our families.

You don’t need a crystal ball to know that everything goes in cycle.

This is true in nature; life and death.

Similarly, the economies of the world with its markets and businesses go through the following phases:

  • Expansion
  • Peak
  • Recession
  • Trough
  • Recovery
how to get ready for the next recession
Rollercoaster Photo credit: Unsplash

When it comes to the real estate market, questions people typically ask are:

  • Will the market go up or will the market go down ? Yes, on both.
  • When will the market go up or down? Unknown exactly. It’s a matter of where we are in the cycle/ sequence.
  • Why will it go up or down? There are many macro- and micro- factors that cause the market to go up or down. Experts are happy to weigh in; although hindsight is always 20/20.

Any market will definitely go up and down. If the current cycle is up, then expect the down cycle, and so on and so forth.

It is helpful to know why it goes through the cycle. But many macro-forces are largely out of your control.

So the important question is what can you control? What can you do when you approach each phase, i.e. peak, then recession?

Expecting the next natural cycle, let us discuss how to plan your moves to prepare for a recession:

  • Real Estate moves to prepare for the next recession – understand home prices, early predictors of a recession, “Buy low, Sell High”, prepare for any calamity that could worsen the effect of a recession on your real estate (i.e. wildfire in California)
  • Financial moves to get ready for the next downturn – buffer up your cash and emergency savings
  • Personal moves to prepare for the next recession – A few co-incidental personal issues that could happen during a recession are divorce, one’s illness, health-related problems and/or death of a family member,
  • Health moves to prepare for the next recession – health is wealth, check for health insurance coverage, premiums, co-pays, etc.
  • Business/ Employment to prepare for the next recession – a few co-incidental issues during recession: job loss, contract losses, mass layoff, business contraction, etc.

Real Estate moves to prepare for the next recession

We all have seen the housing market boom and bust. The generations to come will feel all the after-effects. So, making wise moves now will go a long way in securing your future and your family’s.

External links to Additional Reading:

Be aware of the housing market cycle for where your home is located

There are so many online resources to give you a feel of how home prices are moving. Most people these days rely on automated home valuation provided by real estate websites like Zillow, Redfin, etc. Use this as a starting point, then ask 2-3 real estate agents in your location to show you the statistics that apply to your own specific neighborhood. In addition, locate public records for private sales or off-MLS sales (multiple listing service) in your neighborhood to complete the picture.

Click this link to research the most recent housing statistics for the San Diego Real Estate Market

Buy Low and Sell High

For those who need to realize profits from their home, consider selling at high prices now, rent or downsize, then buy back in when the prices are low.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Warren Buffet

Timing the real estate market sounds good in theory. But if you are a pre-retiree, or already retired, please factor in your age.

Just like in the last recession, someone in their 60s, 70s, 80s, may not have the luxury of time to wait another decade for prices to go up/ down; or go back to work to make up for financial losses.

Also, if you are in a home that suits your needs now AND at retirement, you may not care at all whether the housing market goes up and down.

Read article: Why making a move in advance is smarter than being forced to

On this note, if you are in your 40s and 50s, and approaching early retirement or semi-retirement, it may be smart to trade your home now to one that will fit your needs the future. This immediately lowers your cost of living, allowing for additional savings to begin compounding for future use.

The future home that you may want to purchase, move to, or trade for:

  • a home that has a bedroom on the first floor (anyone who has experienced mobility issues for themselves or a family member, whether temporary or permanent, understands the need to avoid stairs)
  • one story home
  • located close to family, job opportunities, transportation, services, shopping, hospital, etc.
  • multi-generational home that will accommodate an extended family to save on assisted living costs for parents or living costs for children
  • a place that is easier to maintain (less space to clean, landscape, etc)
  • or a home that requires less financial burdens (i.e. mortgage payments)

Read article: How to afford to retire in California

Financial moves to get ready for the next economic downturn

It would be nice to be debt-free, have plenty of liquid cash, a diversified portfolio of investments, and be recession-proof.

But if you are still a few steps aways from making this reality, consider the following financial moves before a recession hits.

Generally, around the peak of an economic cycle (just before a recession hits) favorable conditions for individuals exist:

  • official home appraisal values are still high
  • income stream from jobs, business, independent contractor incomes are coming in steadily (no mass-layoffs and low unemployment)
  • one’s credit profile is good (no 30-90 day late payments, no excessive debt to limit loans, no bankruptcy, no short- sale or no foreclosure)

As the economy moves from peak to recession; the following issues will prevent an individual from making a move:

  • when home prices dip; many homeowners may find that their mortgage balance exceeds the value of the home (Short-sale scenario)
  • faced with slow-down in business income or sudden unemployment, qualifying for a loan becomes harder or impossible
  • credit profiles also take a dive when there are excessive use or late payments on credit cards, student loans, auto-loans, and mortgages

Here are the financial moves that you want to make when economic times are still good!

Cash is king. In a recession, unexpected costs cause extra stress beyond financial. Emotional and mental anguish can result from worrying about where to get the money to pay for necessary living expenses.

Buffer up your cash reserves now

  • Trim away all unnecessary expenses and purchases
  • Subscribe to automatic transfer to a liquid savings account including retirement accounts such as 401K
  • Consider establishing another stream of income for diversification – perhaps leverage existing skills into extra cash in the new “gig” economy.
  • Open a Health Savings Account (HSA) to build up your pre-tax dollars to cover health expenses

Refinance existing debts to lower rates and/ or payments

While you can still qualify, now is the time to refinance, consolidate, and lower any monthly financial obligations including mortgages.

Consider the following questions when you speak with a mortgage loan advisor:

  • How long do you expect to live in the home? There are closing costs, interest charges, and time, to factor in to find out whether a refinance makes financial sense.
  • Could you trim down the years on your mortgage from say 26 years more to go and refinance to a 25 year, 20 year, 15 year mortgage vs. getting another 30 year mortgage if the payments are affordable?

Open a home equity line of credit

Why open a home equity line of credit (HELOC) when times are still good?

  • a home equity line of credit offers lower rates than other unsecured loans such as credit card advances or personal loans in case of an emergency.
  • easier to qualify for a HELOC when home appraisal values are still high, credit and income profiles are good
  • a HELOC provides you immediate cash available in case of unexpected costs such as home repairs, unforeseen medical expenses, etc.
  • you pay zero interest if you carry a zero balance and enjoy the flexibility of paying interest only on what you use

Since a HELOC is secured by your home, be very disciplined on where you use the funds. Otherwise, do not open a HELOC if it will only tempt you to rack up unnecessary debts (i.e. vacation, materialistic purchases, etc.).

Having an open HELOC will adversely affect your debt to income ratio – a key metric for lenders to help qualify you for a loan. Keep this in mind if you plan on buying a second home or another investment property with a mortgage should home prices go down.

Note that some homeowners with high monthly income streams also use HELOCs as a strategy to save cash by paying off their mortgage early and retire early.

Keep your credit stellar or start cleaning up your credit (if needed)

Having an excellent credit is a great asset whether we are in a recession or not. If you plan to apply for any credit such as a HELOC, mortgage, etc.

Do the following first before starting an application:

  • Obtain a copy of your credit report from the three credit bureaus to make sure that your credit history is accurate and correct.
  • Know your FICO – this allows you to shop for the best loan providers and rate quotes.
  • Look up a copy of your 2 previous tax returns, W-2s, 1099s if any, to check if what you declare as income will be easily documented by the lender.
  • Avoid any new applications for auto-loan, store credit card, etc. that could affect your debt to income ratio.

Personal moves to prepare for the next recession

Key personal areas to take care of at any given time:

  • Health
  • Family/ Relationships/ Emotional Support
  • Personal Improvement

Health is wealth

By taking good care of your health, you will save a lot of money on ratcheting up costs for health care such as hospital stays, insurance premiums, prescription drugs, co-pays, etc.

Some health issues and medical expenses are out of our control.

But here are some back to basic ones that you have main control of:

  • getting enough sleep and rest
  • choosing to eat nutritious foods
  • drinking good water and healthy beverages
  • doing daily exercises such as walking – Read article: Walking to your best health
  • surrounding yourself with positive people

Health related costs are now one of the biggest financial burdens in many households in the United States.

You already know how important it is to have health insurance.

Be sure to have an upfront understanding of what your health insurance actually covers.

Request a copy of your health insurance information booklet and be diligent in understanding what your financial obligations for treatment in case you are diagnosed with an illness or a family member has a health issue.

Family/ Relationships

Having a healthy support system from family and relationships helps you have a happier and healthier home life.

Adverse family/relationships that lead to i.e. divorce, custody/ legal battle, etc. can be catastrophic financially.

In fact, divorce is one of the co-incidental reasons we have heard of from families who had to go into foreclosure, short-sale, or bankruptcy during the last recession.

Taking the time to strengthen bonds in your family, or even mending relationships pay dividends in many different ways.

If you are blessed to have rock solid finances, good health, and family support to withstand a recession. We are happy for you. You are in a very good position to be the light in someone’s life.

Personal Improvement

Choose positive daily inputs for better mental and emotional health.

  • The quality of books, blogs, magazines, newspapers, or websites that you read;
  • programs you listen to;
  • movies and media you watch;
  • news and people you follow on a regular basis subconsciously affect your mental health and emotional state.

Strive for personal improvement – the goal is to be a little better than who you were yesterday.

  • Step away from distracting forces in your life
  • Take the time to have quiet time for the mind
  • Do more of the things that bring you peace and smile in your heart
  • Seek inspiring speakers and authors that resonate within you to make a positive change
  • Read their books, listen, watch and learn to dislodge old habits and ways of thinking that are not helpful in your life.
  • Do these these things in repetition until you create new good habits and mental thoughts for a happier life.

Thanks for reading and we hope you found something here that you can share with family and friends.

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