5 Strategies to Survive An Economic Slowdown
With the recent turn of events, I have been giving a lot of thought about what to do in event of economic slowdown — i.e., recession, stagflation, depression, financial doom, or whatever you want to call it. As I put this list of 5 strategies together, I realize that they are nothing more than responsible and sensible financial management strategies — something that should be practiced daily, and not only during economic turmoil.
Photo by archidave via Flickr
1. Practice Frugal Living
I believe frugal living is the basic foundation to sound financial success. A good place to start is with my 50+ Frugal Tips, Ideas, and Resources article. In general, the whole concept can be distilled down to these 5 tenets:
- Spend less than you earn
- Buy only what you can afford — This means reducing your reliance on credit card, and paying off your balance in full every month
- Cut your expenses – I listed a couple of money saving ideas in my articles: 40 Ways You Can Save Money And Our Planet and Top 10 Money Wasters, Are You Guilty?. A good place to start is with your budget. If you don’t budget, a money management tool like Mint.com, Quicken Online, or YNAB Pro can make the process easier.
- Reduce your debt — Except for your mortgage, you should actively try to eliminate your debt. A good place to start is learning about Dave Ramsey’s Debt Snowball, debt elimination process.
- Make every dollar counts – Stretch your money and make every dollar count. In my article 22 Money Maximizing Moves You Can Do Today I shared some techniques that you can use right away.
2. Bear-proof Your Investment Portfolio
Over the years, I have come to believe that best long-term investment strategy is to leverage a globally diversified investment portfolio consists of low cost passively managed funds that reflect your risk tolerance level and investment time horizon. This is a strategy that Larry Swedroe advocates, and you can read it in his book: The Only Guide to a Winning Investment Strategy You’ll Ever Need.
There are two main parts in this strategy:
- Keep the costs low — For instance, limit the number of trades, choose low cost brokerage with minimal fees and low trade commission fees, choose low expense ratio mutual funds, limit tax liabilities, etc.
- Diversify – Spread your investment across different stocks, asset classes, sectors, countries, and beyond equities.
3. Establish An Emergency Plan
If you lose your ability to generate income, do you have enough cash reserve to stay afloat? More importantly do you have an emergency plan to keep you out of trouble? Here are some good articles to get you started:
- Does Your Family Have An Emergency Plan?
- How To Protect Your Greatest Asset, 6 Ideas
- Dave Ramsey Baby Step 1 $1000 Emergency Fund at Gather Little By Little
- Dave Ramsey Baby Step 3 Fully Funded Emergency Fund at Being Frugal
4. Protect Your Job
For most people, their job is their biggest source of income. During recession, the chance of unemployment increases dramatically, and we have seen many examples this past few months. Fortunately, there are a few things that you could do to project your job.
- Networking — If you haven’t done it already, this is a great time to start.
- Get to know your peers and the higher ups better.
- Take on special projects that expose you to other people outside of your immediate workgroup.
- Join caucus groups, industry groups, and associations.
- Help your company increase profit and revenue
- Help your company reduce expenses
- Make sure your good work is noticed
- Expand your skillset – Getting a new certification or skill can make one much more marketable.
If you ended up losing your job, here are some articles to help you What to Do If You’re Laid Off? and How To Deal With A Job Loss.
5. Diversify And Grow Your Alternative Income Streams
Now that you all your bases covered, it’s time to think about different ways to increase your income. If you are reluctant about building alternative income streams, I’d like you to consider this statement carefully:
Your job is not going to be there forever. You can’t work forever. And you can’t retire until you figure out a way to replace income from your job.
Don’t wait. The best time to start building your alternative income streams is now.
What others are saying about surviving economic slowdown:
- A Surprisingly Large Number of Things can be Lived Through at Mrs. Micah
- Survive A Recession, Think Long Term at The Digerati Life
- 5 Ways I Plan To Survive The Recession at The Wisdom Journal
- Why NOW is the Best Time to Get Out of Debt at Credit Withdrawal
- 12 Ways to Make Yourself Recession-Proof at Prime Time Money
- How To Protect Yourself Against a Recession at Mom Grind
This post was featured in the Festival of Frugality #119 hosted by Consumerism Commentary.
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inflation, frugality, emergency, Dave Ramsey, Risk Tolerance, alternative income, recession, Bear Market, depression, economic slowdownRecommended articles
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Great article – thanks.
“Spend less than you earn” – saving? It’s been a while since Americans have done that.
According to MSN’s Money Central, Americans’ personal savings fell to -0.5% last year, the first time since the Depression that the savings rate has been negative for a year.
part of that may be that Americans have been feeling wealthy since their homes were appreciating so much. Maybe now, with less confidence, savings rates will start improving.
Diversifying income streams is a huge advantage during an economic downturn. Decoupling one’s income with a single market is a surefire way to survive a recession. I suppose this is one reason having a job is a poor long-term approach to building wealth as you are tightly-coupled with your employer’s market performance for a salary.
Great tips, Pinyo. I think the tips on diversification are great – diversification with income, investments, etc. Protecting your job is another extremely important thing to do, and your tips are excellent. One thing you could add is expand your skillset during this time. Getting a new certification or skill can make one much more marketable.
What a great time TO diversify! investments, for sure; but also job skills. I am trying (with limited success) to encourage our college aged kids to VOLUNTEER for what have, in the past, been salaried jobs. My reasoning is schools, public services, even businesses, still need folks–they just can’t pay for them right now. Great opportunity to get that all important experience, when they’ll be grateful for the help, willing to take the inexperienced, and one can position oneself for what will eventually turn around and become a paying position/job skill.
Instead of spending less than you earn, I like to think of it as earning more than you spend. It gives you that drive to seek out different opportunities. Regardless of the economy.
Are there any strategies to survive an economic speedup?
@MinWage,
A yacht, private island and some armed, but discreet guards was what I had planned for an economic speedup. Richard Branson beat me to the punch though.
@Pinyo, great post. Very timely and informative. Thanks for including a link to me too!
Thanks for the link to my article, Pinyo!
I’m working on all of the above! Great post! I have to admit that I’m trying to beef up my EF as quickly as possible!
Randall -
That’s hilarious! But while the question appears ridiculous, it is a sincere question.
Economic speedup –> job growth –> more people employed –> unemployed twentysomethings living with parents move out and get their own housing –> rental vacancy rates decline –> rents go up while the already-employed unskilled worker didn’t get a raise.
Agree! But, I would add one other: build up your “war chest” so that you can pick up some investment bargains (be they stocks and/or real-estate) as and when you are ready … I missed some of the last couple of years of the Bull Run because I progressively cashed up to take advantage of the Bear market that was sure to come … and did. Just remember: after every bottom there is another top …
This is the right way to run your finances regardless of the economic climate. Of course, people are a lot more interested when they have a little fear in them. Great suggestions!
@Vered – Thanks! Yeah, I was looking at that statistic a while back. Negative savings is scary.
@Squawkfox – Not just for economic downturn, I think it’s good at any time.
@Patrick – Good add. I am going to add that to my article.
@Jay – Good luck with your kids. I wasn’t very interested in volunteering when I was in college. Now I wish I had tried harder.
@Anthony – That’s definitely better.
@Randall and Ron – No problem.
@SavingDiva – Thanks. Always good to have an emergency fund; especially since some online savings still give “relatively” decent rate.
@AJC – But aren’t you missing opportunity trying to time the Bear market?
This is a great advice for any kind of economic situation.
These are excellent cornerstones to work by. I especially agree with frugal living and diversification. The more flexibile and adaptable you are as an employee, then the more valuable. So get on as many training programmes as your budget can afford or that you employer will pay for.
I’d definitely consider diversifying but I feel like a lot of those take a lot of time or they require that you already have a lot of stuff to offer. I remember selling a bunch of stuff on ebay but it took up so much energy in putting everything up and I wasn’t sure if it was worth my time. Then, I just ran out of things to sell. Frugal living seems like the popular way to go, and you probably end up feeling good about yourself – kind of like beating the system.
The financial crisis is spreading to all the sectors and the ultimate results will be available by the end of 2009. Anyway the crisis is very crucial to all western markets since its a prestigious counter movement from these governments and it should show some good results by the mid of next year at least. But in terms of Asian countries, it is a good opportunity to find alternative solutions and reconfirm their best practices followed over the past years. Some of the basic causes of financial crisis is, bad credit loans processed by the financial institutions to the customers and third parties. But in case of growing markets, most of the banks are assuring the creditworthiness of their clients twice since most of the clients are not high profile clients. Hence this didn’t make much impact on their financial systems and processed loan payment schedules.
@Aya — My response to anyone who think building alternative income is a lot effort is this. Think about how long it takes for your to build your current income. For the most part, it’s 4 years of college plus professional school; or a few years of trade school / apprenticeship. After you realize that, then it’s not too “expensive” to invest 1-2 years to build alternative income that’s 20-50% of your current income.
I think that now more than ever, frugal living has become essential to surviving the global recession that we now find outselves in.
@Pinyo – I see your point, and you need to have a steady income in order to move on to diversifing, which means its a big effort. However, I can imagine that for someone with a steady income but is interested in other venues, it can be an appealing strategy. I am far away from even considering other options, which may be why I am not able to think about it on the same terms as you?
I think the emergency fund is the best thing right now. I suggest that people pour money into it. If you don’t already have 6 months saved, get yourself there. If you already have six months, take it to 8 months. When the economy gets back on track, you can always take out some of it and put it wherever you want, but to have it there for emergencies during an economic emergency is the best thing
The financial crisis is spreading to all the sectors and the ultimate results will be available by the end of 2009. Anyway the crisis is very crucial to all western markets since its a prestigious counter movement from these governments and it should show some good results by the mid of next year at least. But in terms of Asian countries, it is a good opportunity to find alternative solutions and reconfirm their best practices followed over the past years. Some of the basic causes of financial crisis is, bad credit loans processed by the financial institutions to the customers and third parties. But in case of growing markets, most of the banks are assuring the creditworthiness of their clients twice since most of the clients are not high profile clients. Hence this didn’t make much impact on their financial systems and processed loan payment schedules. (for more details)
With the greatest respect we can all make savings and cutbacks and be more conscientious about our earnings and our spending. I believe that it is up to each of us to protect our homes for our families. Not just with life insurance in case we die or have a critical illness. We need to consider the consequences of either ourselves or our partners losing their jobs through redundancy and then being out of work for a long term. These circumstances can and do cause many people to slip into debt. Therefore as part of any Survival plan you should ensure that you have adequate Accident, Sickness, Unemployment and Redundancy cover to protect your mortgage payments. If you can afford more then cover more of your other living expenses.This is a great post and extremely informative.
Of all the items you listed above, I think #5 Establish alternative incomes is by far the most important. Unfortunately, it’s also the bullet point that takes the most planning and time. Once you have multiple forms of income though, it’s almost impossible to lose everything at once. Being frugal helps too. Great post!
Great Post. In this economy it is so critical to have alternate streams of income. The job that you have today may not be there tomorrow. I like to take the alternate streams idea a little further.
You know how we talk about diversifying our investment portfolio? I think it is a good idea to even diversify the work that you do to generate income. For example, if I am a laborer and hurt my back and am out of work for 3 – 6 months; I can possibly make additional money consulting, blogging, or doing anything else that does not require a lot of physical movement.
For those who are juggling 2,3,4,5 or more different revenue streams; please don’t forget to take care of your health. Eat right, get plenty of rest, exercise, and get periodic check ups.
Be well.
In order to protect myself, I decided to create an alternative source of income via internet website. While I am not making as much as my regular job, I now have 2 different sources of income.
If I ever lose my job, I’ll be able to concentrate on my small business and still be able to eat 3 meals a day
Another trick is to visualize what would happen. Try to imagine that today is your last day at work; what you would do in the next 5 days? If you have an idea, you won’t be losing time running around, crying and whining.
@Aya — That’s a definite possibility. I agree that if you are not meeting your needs now, it’s hard to focus on other things that do not provide immediate relieve.
@Kevin — I agree to the extent that long term investment strategy is not sacrificed — i.e., I would not stop contributing to 401k or IRA in order to build emergency fund.
@Alisa — Great add about taking care of your health; especially when it could be expensive enough to bankrupt you.
GREAT tips and so useful for now and when things get better. We need to have a plan and system in place. It can be our security and insurance for the future regardless of what happens. I just hope that Obama’s policies will lead to positive change for everyone.
The best advice is to cut out 100% reliance on your full time job for income. We all rely on a full time job for steady income, but the goal should be to have multiple streams so that in case something happens to our steady job we wont be homeless..
It is probably time to make a huge step in our career and start looking into other income opportunities especially ones that are potential to replace our full-time income eventually. Can’t rely on our companies/ employers for too long. This will get worse.
Not so easy to get used to frugal living. Just one word, try our utmost to earn more instead of less spending. To survive, to enjoy. We cannot let ourselves changed abruptly. Also time to consider to find optional job and get additional money to relieve our burden, replenish our daily life, That also need time and energy. So dears, hope all of us good health.
@Elisheva – Let’s put it this way, my blog gave me a 30% “raise” last year. My full-time job would never give me more than 5% on any given year.
It has been many generations since we learned to live within our means and spend only what we could afford. We have all enjoyed the good times and now that the bad times have arrived all our governments want to throw us all head first into yet more debt.
Does anybody really know how to solve the problem of this recession?