Managing Your Money During a Global Recession
11 tips to help you thrive.
Right now, we are collectively facing a global recession. The situation started last year when the complicated American Repo Market showed signs of cracks. Now those cracks have begun to show stress.
The Federal Reserve and US Government have attempted to patch over the cracks using stimulus, helicopter money, the lowering of interest rates, repurchasing of bonds, and their favorite trick: printing money out of thin air. It hasn’t worked and is unlikely to work. Just look at how low the US stock market is right now for factual evidence.
Every time they pull out a new tool to use, the stock market reacts negatively. Digital assets and even gold are reacting the same way — going down. For those of you who didn’t study finance and don’t understand monetary policy, there are seven places you can put your money:
- Physical cash in your wallet
- Cash held in the bank
- Gold
- Assets stored in digital wallets
- Stocks
- Bonds
- Real estate
Your percentage split between each of these seven categories is referred to by bearded men in finance as “asset allocation.” This mix changes during good times and difficult times like right now. Managing your money during a global recession comes down simply to the mix between these seven categories. It literally is that simple to understand.
After studying money for ten years and preparing for a moment like this, here is how to thrive in a global recession (not financial advice, obviously).
Do nothing if your emotions flare-up
Emotional decisions in a recession are a bad idea. Why? Fear is at an all-time high during a recession and that is the worst way to react and protect your money.
If you feel emotional, start with doing nothing.
Let your emotions subside and turn off the news. Fear causes you to think irrationally and that looks like this:
- Listening to financial gurus on Youtube
- Asking friends who have no idea about money
- Betting big
- Making risky choices
Doing nothing is a highly underrated strategy in recessions.
Selling locks in your losses
There is one idea people completely forget in a global recession: you only lose money if you sell your assets/investments. Selling locks in your losses.
If you buy a particular asset, hopefully, it’s because you learned about that asset and made an informed decision. Going against all the research and time you put in to make that investment decision is undoing all your hard work.
Before you assume I’m giving you suggestions without taking my own advice, let me share with you my situation.
Right now my investment portfolio is down 40%.
Across all my investments, I’ve lost more than 50%.
The only reason I’m not running around in a panic is that I didn’t sell anything. In fact, I did something cheeky: I bought more assets.
Add safe havens
A safe haven in a recession is also known as gold. When fear is rampant, people buy gold as they can hold it themselves and it’s a scarce resource that can’t be destroyed by inflation or money-printing governments giving away what looks like free money to its citizens. Nothing is free during a recession, but you already knew that.
How much of your money is put into a safe haven like gold is up to you. Well-known finance gurus with a proven track record such as Ray Dalio, recommend 10% of your money.
You might be wondering why I didn’t list cash in the bank as a safe haven. The trouble with cash in the bank is that it’s not your money. If the bank has a financial problem, similar to the one we faced in the 2008 Global Financial Crisis, you become an unsecured creditor of the bank. If they go down, some or all of your money could be used to bail them out. This is referred to as “bail-in” by the bearded dudes in pinstripe suits.
It means if the finance industry uses your savings to gamble with, and their bets are wrong, both of you could lose. (This is known as derivative trading where traders bet against an asset like stocks/bonds that they don’t actually own.)
I want to reiterate that this information shouldn’t make you cynical or angry — it’s just the facts. If a bank was to go under, the only way you could get your money back is if the government decides to step in and give some or all of it back to you. This is completely their call and if they decide to do it, they will print more money out of thin air.
The issue with printing money
I’ve mentioned money printing a few times and you might be wondering “What the heck is wrong with that?”
I’m a simple guy so let me give you the straightforward answer: money printing makes your purchasing power weaker.
The flow-on effect is that money printing creates greater inequality. What does that mean? The rich get richer and the poor get poorer. How?
The rich use the money that flows into the system out of thin air to buy more assets like stocks, bonds and real estate which generally, in the long run, go up as inflation goes up.
The rest of us use the money that we get out of thin air to buy groceries and stay afloat. If you don’t own assets that go up with inflation, you lose when money is printed out of thin air.
Those with the assets get richer. Those without the assets get poorer and their savings are worthless.
Keep calm
The key to managing your money during a recession is to practice being calm. Here are some practical strategies:
- Read books that are not about finance
- Escape with movies that take you to another world
- Meditate using your favorite app (Calm works well for me)
- Breathe deeply
- Netflix and chill if your mind is racing a million miles an hour
You make stupid financial decisions when you’re not calm, which cause you to work more hours, to earn money doing work you may not enjoy.
Don’t throw away your life savings because of your mental state. Breathe.
Diversify
Having all your money in one place is the quickest way to lose in a global recession. Moving your money between the seven places you can put money is the best strategy.
In a recession, stocks are risky. That doesn’t mean you don’t own any. During normal times you might have 20% of your money in stocks, and during a recession, you might keep 5% in stocks. Adjust the percentage split between each asset type based on your individual situation.
For example, if you have kids, keeping your family home may be your number one priority versus a millennial like me who is happy to take a bit more risk and doesn’t have any debt.
Spread your money between banks
This is not fear-mongering. In 2008, we learned what can happen to banks the hard way. Thankfully the banks got bailed out but this is not guaranteed.
It takes a few minutes to open a bank account and it can help you keep your life savings. During a global recession, spread your money between banks. That way, if one does go down because of a black swan event, you can at least access the rest of your money.
Right now I have five banks I’m using. Each of their internet banking apps is on my phone so that I can access my money quickly if need be and transfer money out of the traditional system. It’s unlikely to happen but it gives me peace of mind that I can if need be.
Don’t let a 100-point identification check be the barrier between you and protecting your money.
Too much greed will screw your future
The biggest mistake people make in recessions is to get greedy. Contemplate that you might lose your job or the business that provides you with 90% of your freelance income could go down.
Your social media following is owned by companies that could disappear. Your marketing strategy and years of work posting content could go away overnight.
How do you prevent greed? Have a 20% buffer.
How ever much money you think you need to survive a recession, add 20% to that number. Have more money than you think you need to pay bills and rent. Don’t get lazy and think someone will bail you out because that’s the worst strategy that will leave you and your family broke.
A recession forces everything to go on sale — bargain hunters love it
There are many ways to look at a recession.
An optimist like me sees it a little differently. A recession is when everything goes on sale. Those tech stocks looked damn expensive a few months ago. Now they are starting to look more like a bargain.
A recession doesn’t have to be a sad event. For many who are entrepreneurial, a recession is when fortunes are built and companies are created from nothing.
A recession is an opportunity depending on how you choose to look at it.
Money can be a curse in a recession
This one might surprise you. Money can be a giant pain in the ass during a recession. Why? You want to protect every dollar.
Seeing years of investing returns go down the drain can be hard. The temptation with really rich people is that they hoard money. The people that lose their minds in a recession are often rich people.
Losing a single dollar can feel worse than losing a loved one. Their reality of the world has been messed up by money and they derive validation and self-worth from the amount of money they accumulate. Billionaires are just hoarders of money.
Maybe you don’t need more money. Maybe you need to put money into perspective so it doesn’t become an obsession that turns into a curse.
Sit on the sidelines in cash if you must
Being in cash has its advantages in a recession. If you have no idea what to do, sit in cash. Take it easy and de-risk yourself. Hoard physical cash, or spread cash amongst multiple banks.
The meaning for your life can be amplified
Many people need help during a recession. For writers like me, recessions are when one can find their voice and discover new ways to be helpful.
Your purpose can thrive during a recession.
I have spent years working in finance and studying it. All of this work and research seemed useless to me last year. I did nothing with all of that knowledge. A stock market crash has helped me to realize that all that knowledge of finance might be helpful to people who haven’t had a crash course in money and how it works.
Suddenly, I have a new angle to inspire people. If all you do is make money or understand it, that’s only going to take you so far.
The point of money once you properly understand it is to use it to help other people and amplify your goals in life. Money helps you work less so you can focus more on the work you love doing and may not get paid to do.
A global recession is tough to face. If you’re not used to them or have forgotten the last one in 2008, they can take you by surprise. Recessions can turn your world upside down and that can be an opportunity to thrive.
Take it easy out there. Manage your money carefully and don’t be afraid to not do anything. Keep a bigger buffer of money than you think you need to.
And don’t forget: life is about more than how much money you have in your bank account.
If you manage your mindset in a recession, you can manage your money.