YouTube: https://youtube.com/watch?v=wcCLeZs7zb8
Previous: Money Gossip: Cringeworthy Stories, Crazy Rich People, And Venmo Culture
Next: A Post-Roe Q&A With An OBGYN

Categories

Statistics

View count:150,692
Likes:5,574
Comments:400
Duration:16:51
Uploaded:2022-08-02
Last sync:2024-07-06 11:45
Thanks to Avast for sponsoring this video. Check out Avast One at https://avast.com

In this video, Chelsea dives into the do's and don'ts of financially preparing for a recession. You can't always prevent the worst from happening, but you can prepare for it, from staying in a stable job to fleshing out your emergency fund.

Script by Maggie Olson

Source links:

https://www.cnbc.com/2022/07/02/some-experts-say-a-recession-is-coming-how-to-prepare-your-portfolio.html

https://www.businessinsider.com/personal-finance/what-is-a-recession

https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html

https://www.schroders.com/en/uk/private-investor/insights/markets/the-data-that-shows-a-case-for-long-term-investing/

https://www.cnbc.com/2022/05/24/last-in-first-out-risks-of-joining-great-resignation-in-a-recession.html

https://www.federalreserve.gov/publications/2022-economic-well-being-of-us-households-in-2021-dealing-with-unexpected-expenses.htm

https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-1000-emergency-expense-with-savings.html

https://www.esrcheck.com/2022/05/03/great-resignation-4-5-million-workers-quit-march-2022/

https://www.gobankingrates.com/money/jobs/more-than-9-in-10-working-americans-have-side-hustle-2022-is-it-best-way-to-boost-income/

https://www.nber.org/digest/sep11/job-loss-great-recession

https://www.valuepenguin.com/average-credit-card-debt

https://www.cnbc.com/2022/06/15/what-the-feds-highest-rate-hike-in-28-years-means-for-you.html

https://www.washingtonpost.com/business/2022/06/15/7-tips-on-how-to-survive-a-recession/

https://www.creditninja.com/what-percentage-of-co-signed-loans-default/

Join this channel to get access to perks:
https://www.youtube.com/channel/UCSPYNpQ2fHv9HJ-q6MIMaPw/join

The Financial Diet site:
http://www.thefinancialdiet.com

Facebook: https://www.facebook.com/thefinancialdiet
Twitter: https://twitter.com/TFDiet
Instagram: https://www.instagram.com/thefinancialdiet/?hl=en
Hey, guys. It's Chelsea from The Financial Diet. And thanks to Avast for sponsoring today's video.

Trusted by over 435 million users, Avast prevents over 1.5 billion attacks every month by empowering you with digital safety and privacy no matter who you are, where you are, or how you can act. Avast's new all-in-one solution, Avast One, helps you take control of your safety and privacy online through a range of features. Their best protection yet, Avast One gives you everything you need to take control of your safety and privacy online, and is accessible through a single, easy-to-use interface.

And because Avast believes essential protection should be available to everyone a free version of Avast One includes award-winning free AV, free VPN, free firewall, and much, much more. Avast's security solutions stop malware, phishing, and virus attacks, and secures your personal photos, documents, and other files from being modified, detected, or encrypted by ransomware. And I have to personally vouch for the extent to which software like this can give you such a level of peace of mind when you are a digital creator or someone who does a lot of their business online.

My co-founder and I are doing a class soon all about the 101s of being an entrepreneur, but especially if your business takes place digitally-- which, increasingly, almost everyone's does to some extent-- having the right protections is super important. So Thanks to Avast for supporting TFD. Confidently take control of your online world with Avast One.

It helps you stay safe from viruses, phishing attacks, ransomware, hacking attempts, and other cyber crimes. Learn more about Avast One at avast.com. So, as you may have heard, many financial experts are predicting that we will be in some kind of recession in the near-ish future.

In fact, by the time this airs, we may already be in a declared recession, who can say. And of course, no one can predict the timing of these things, but many experts do seem to be predicting a first half of 2023 type timing. And for many young adults, this may be the first true recession that they're experiencing.

Or for people of my middle millennial generation, this will be the first one that they're experiencing as their own independent entity, as I was still living at home with my parents in 2008. But the sort of silver lining to this, although it's hard to call it that, is that we've been living in a pretty darn turbulent economy for the past several years, especially due to not just the pandemic, but things like record high inflation, the war in Ukraine, political upheaval, and swiftly rising interest rates. So while the idea of being in a real, full-fledged recession can still feel and is, for many, quite scary, it is not, I don't think, going to be the same sensation that it was for many in 2008 of the music suddenly stopping.

That music has been going crazy for a while now. And just so we have our terms clear, a recession is broadly defined as a fall in GDP in two successive quarters. But what a recession will look like for everyone on an individual level is going to totally vary.

But let's get into the most pragmatic way that I think we can approach this as viewers of TFD, which is just the dos and don'ts of preparing for a recession. Do remain calm. So, as I said, it is very normal to feel anxious about what may be a coming economic downturn, especially if it is your first time experiencing one.

But it's also important to remember that recessions are a very normal part of the economic cycle. If you're old enough to be watching this video, you've probably survived at least one major recession already, even as a child. In fact, there have been 33 recessions in the United States since 1857.

And guess what? We've recovered from every single one of them. The economy has never once failed to come back stronger after a recession.

However, of course, it does not recover overnight, and there are steps that should be taken to protect yourself as much as you can. But succumbing to panic is not going to do you any good. So it's important to just take a step back, look at your own finances, and make a plan based on your needs, goals, and things like the volatility of your industry, for example.

Because for many people, the recession is going to be very different if they lose their job or take a big pay cut versus if they don't. It's also important to take steps to protect your mental health. You are absolutely not obligated to read every terrifying bit of market news or doomsday Twitter thread.

You can curate a media experience for yourself that allows you to stay informed while avoiding just hyperfixating on the worst possible outcomes, or confusing just constantly reading bad news with doing something productive. And this is also very important for a practical reason, which brings us to our first don't, which is don't sell your portfolio in a panic or make emotional investment decisions. So one of the most dangerous things to do in investing is reacting based on emotions to market fluctuations.

As we've discussed many times at TFD, the idea of investing, especially if you're investing for retirement, is investing over the long term. That means decades. And as I mentioned, it is inevitable, basically, that various market fluctuations and recessions and dips in the value of your investment will happen several times over the course of your investment horizon, which means, basically, how long you're investing.

And the worst thing you can do at this time is take out a bunch of money in a panic because you're scared of it decreasing in value further. Because let's remember that even if you're showing a loss of 30% on your portfolio because of a downturn in the market, those losses are only theoretical until you take the money out and do what is called locking in your losses. Staying invested for the longer term and making space for that market recovery is not just a good idea.

It is almost literally essential to realizing the average gains over the long term in the market because it's also not uncommon for the market to have its best days shortly after its worst days. And you could miss out on some really big growth if you sell all your stocks when the going gets tough. In fact, the market usually experiences its most dramatic growth in just a few days throughout the year.

JP Morgan conducted a study on the best market days over the past 20 years. They started with a theoretical scenario in which someone invests $10,000 in the S&P 500 on January 1, 2002. If that person proceeded to leave their investment alone for the next 20 years, they would end up with $61,000.

However, if that person had missed the 10 best market days over the 20-year period, they'd have less than $30,000. So doing everything you can to not just avoid having to take money out of the market, but to avoid the very human temptation to panic and do it because it feels like the smartest thing to do when you're afraid of things getting worse, is one of the most important mindset shifts you can make going into a possible recession. The next do is keep investing.

It can be really tempting-- and sometimes, let's be clear, necessary-- to stop contributing to investments like retirement during a recession. But this is actually counterintuitive thinking. Now, let me be clear that if you experience a loss of income or, God forbid, your entire job, or are having to make other unexpected payments during a recession, yes, of course, you may not be able to keep contributing to long-term saving and investment the way you had before, and there's no shame in that.

But if you have the ability to keep investing, it is actually incredibly important that you do so during a recession. When the market drops, it is called a bear market. And the price tag on most stocks drops along with it.

So to use a highly simplified metaphor, it is almost like they're on sale. Now, that does not mean that you should only buy-- or, really, overbuy-- when the market is down, but it definitely means that this is the time at which your typical contributions are getting the most bang for their buck. And if you wait until the market is booming again and you feel better about investing, you're actually getting less value for each dollar you put in.

So whether you have a 401(k), a Roth IRA, or just a regular brokerage account, stick to your plan and keep investing. And again, remember that you are in it for the long haul, and that history has proven over and over that staying the course is the right investment strategy. A Schroeders study of 148 years of investment data shows that the longer you stay in the market, the more likely you are to avoid losses.

And researchers compared scenarios in which imaginary people invested for different lengths of time and calculated their odds of gaining versus losing money. They started with a one-month timeline, and they found that if you invested for just a month at any point during the 148-year period they studied, your odds of losing money were 40%. But if you invested for a year, your odds of losing money were around 30%.

As they studied longer and longer time horizons, they found that the odds of loss dropped steadily. In fact, if you invested for a 20-year stretch during their study period, the odds of losing money were practically zero. However, while your investment strategy should remain solid and consistent, on the opposite side, you don't want to take on any extra debt or make any big purchases in the lead-up to what may be a recession.

Now, if you absolutely can't help it, and let's say your car is on its last legs and you absolutely need to get another one, OK, fine. You may not be able to avoid making a large purchase. But in general, now is not a time to be burdening yourself financially any more than you absolutely have to.

That's because your risk of losing your job and your financial stability is higher during a recession. According to CNBC, over 20 million jobs were lost around the world during the financial crisis of 2008 and 2009. So you do not want to saddle yourself with any extra monthly payments and then suddenly be unable to pay it.

Plus, it's pretty common for recessions and interest rate increases to go hand in hand. Sometimes you can lock in the interest rate on your payments and protected yourself from an unexpected price hike, but this is not always the case. And in a worst case scenario, you could find yourself facing the harrowing possibility of losing your paycheck and having to make higher payments on a big purchase.

So think carefully about any big purchase or extra debt you might be taking on, and do keep in mind that if you are looking at buying something that has interest, that you are locking in the best interest rate you can and not subjecting yourself to potential future interest hikes as soon as they start to go up. However, you do want to prioritize your emergency fund above all. So an emergency fund is simply a stash of money that is available to you whenever you need it-- i.e., it's not tied up in an investment account or a house or whatever-- that covers about three to six months of living expenses, again, at their minimal expense.

We're not talking about three to six months of partying all the time. This is to cover things like potential job loss, or unexpected repairs, or medical bills, or whatever may come up in an emergency. Now, if you don't have an emergency fund and you're doing something like contributing to 401(k), that's already a bad order of operations.

We like to say here that living without an emergency fund is like driving without a seatbelt or riding a bike without a helmet, and it's probably the most dangerous thing you can do. So, in general, we prioritize saving for your emergency fund before doing literally anything else except making minimum payments on debts so that you don't go into default. But emergency funds and more aggressive emergency funds are extremely important prerecession.

According to the Federal Reserve, over 30% of American families are currently unable to cover an unexpected $400 expense. And it's not that hard to imagine getting a surprise bill for $400. $400 is a fairly modest medical bill. Even just getting new brake pads can add up to $400 or more.

And the situation is even scarier when you think about a $1,000 expense because 56% of Americans couldn't pay that type of bill without having to put it on a credit card, borrow from a friend, or take some other drastic measure. In other words, it really doesn't take much to completely derail a person's finances, and that is doubly true in a tumultuous environment, such as a recession. So, leading up to a recession, make sure that your emergency fund is in place and available and enough to cover three to six months of living expenses.

If you don't have one, make it an absolute priority to save up at least that first $1,000 before you do basically anything else. However, don't quit your job without a solid backup plan. Now is probably one of the worst times to quit your 9:00 to 5:00, if you have one.

And I know that's kind of hard to hear because we are just coming off of what has been referred to as the great resignation, where American workers set a new record in March of 2022 when over 4.5 million of them resigned in just a single month. And it can be awfully tempting to jump on that bandwagon, but now it's not a great time to rage quit your job because finding a good job is statistically a lot harder in recessions, when a lot of companies are going on hiring freezes, if not active layoffs. However, if you are looking to make a change, there are some things you can do that are not putting you in unnecessary jeopardy before a recession.

First, look into brushing up on some new skills. You can learn just about anything on YouTube, from coding to search engine optimization. Plus there are resources like the Khan Academy, Udemy, or Skillshare where you can take classes for free or just small fees.

Secondly, try to bring on a side gig. Lots of people do extra work outside their day jobs, from taking online surveys for money, to selling handmade items, to doing freelance work. And your income will vary based on what you do, but average monthly income from a side job in America is almost $500 a month.

And you don't have to double your working hours either. Just a few hours every week is all it takes to pad your finances. And third, make sure that your resume is up to date. 11% of workers with college degrees lost their job during the Great Recession, and that number was even higher for workers with a high school diploma.

So overly planning for an instance in which you may lose your job or find that you are not earning what you need to be during a recession, making sure that you are in the best possible position to move to a new company during that recession is the best thing you can do. This is also a good time for our regular reminder that most people do realize their largest raises when they change employers. So it also could be a good time to look into what you're being paid compared to the rest of the industry and make sure that you're ready to approach any opportunities that come your way by having the most up-to-date resume, personal website, and things like that.

Hell, even talk to a headhunter. Why not? Then you do want to pay down debt, especially credit card debt. 45% of American families are currently carrying some kind of credit card debt.

And if you're one of them, that is nothing to be ashamed of. But if you're looking for motivation to pay it off more quickly, this is it. It is very common for interest rates to go up during recessions.

In fact, the Federal Reserve recently announced the highest interest rate increase in years at 0.75%. Now, granted, this isn't going to affect everyone the same way, but some credit cards have what's called a variable rate, which means that the interest rate can change over time based on a number of factors, including changes announced by the Federal Reserve. If you have a variable rate credit card, for example, your interest rate could be going up.

And this can, in turn, force you to increase your payments and draw out your payoff timeline. The best way to avoid this if you do have one of these cards is to be more aggressive now about paying down as much as you can while the interest rate is still lower. But there are two other things you may want to consider if you are in a position of carrying serious credit card debt heading into a possible recession.

One is consider switching to a balance transfer card, which most major banks offer on zero or very low interest rates for the first year, which gives you some time to wipe out your debt without all your money going toward interest payments. And just so you know, these cards usually do switch to a pretty high interest rate at the one-year mark. So do the math and make sure you really can pay it off before that happens.

But if the timeline works for you, a balance transfer card can be a fantastic option for paying down credit card debt. And second, just call up your bank and ask them if they will lower your interest rate. The worst thing they can say is no, but there is actually a good chance they'll say yes.

According to a chief credit analyst at LendingTree, about 70% of people who ask for interest rate reductions actually get them. That's awesome. Lastly is do not co-sign on a loan.

So, in case you are not familiar with the concept of co-signing on loans, here is a very quick breakdown. Basically, let's say your friend or sibling takes out a loan and asks you to co-sign. When you co-sign, you're essentially signing up to be their backup.

But if something happens and they can't make those payments anymore, which is even more likely during a recession, you are very much in the hot seat at the worst possible time to be in one. And the odds are not in your favor. Almost 40% of co-signers end up having to pay back some or all of the loaned money because the original borrower can't make payments so unless you feel absolutely confident that you are willing and able to take over payments if something happens, do not co-sign on a loan.

And if you really want to help someone out financially, consider giving them cash for a down payment or granting a personal loan instead, but do not put yourself at risk of having to make massive payments when you're facing down a recession. Now, I know that's a point that doesn't apply to everyone, necessarily. But if you are in that position, it is incredibly important to consider.

In general, preparing for a recession is just part of living a healthy financial life because they can and do happen on a pretty regular basis. But the good news is we know how these things work, and we know how we can best prepare for them. So don't forget the dos and don'ts, and again, most importantly, do not panic, keep calm, and watch The Financial Diet.

As always, guys, thank you for watching. And don't forget to hit the Subscribe button, and to come back every Monday, Tuesday, and Thursday for new and awesome videos. Bye.