EduCounting

Episode 164: Recession is no Recess

How to prepare for a recession

SHOW NOTES

This episode, we look at what recessions are, what causes them to happen and how we can prepare for the potential of an oncoming recession.

Money is getting more expensive, costs are increasing and it looks like we’re heading towards a recession, but what does this all mean?

This episode, we look at the current state of the American economy, the indicators that point to us heading towards a recession and how we can prepare for potentially harder economic times.

“Markets have bounced back in the past so don’t forget that.” – Ben Jones

“Make sure you have an emergency fund.” – Ben Jones

Time Stamps:
00:59 – Things that cost more because of inflation.
01:39 – The indicators that we’re heading towards a recession.
02:06 – What the business cycle is and how it works.
02:59 – What it means when people say we’re in a recession.
04:00 – Why Elon Musk is changing workers from salary to hourly contracts.
04:45 – How Netflix has responded to GDP falling.
05:45 – What you should do to prepare for a recession.
07:40 – How money is getting more expensive.
09:55 – How to make extra money online.

Resources:

Ryan Trahan

MrBeast

Wag

 

Connect with Ben Jones:

 

TRANSCRIPT

DAD: Welcome back to Money with Mak & G. Thanks for being here. Looks like it’s time for me to jump in since I haven’t been here in a while. The kids are trying to enjoy the summer because they’ve earned the time off. As parents, I’m sure we’re all thinking “Haven’t I earned a summer off?” I guess we’re not as lucky as our young offspring.

Usually, things during the summer, from a money perspective are pretty calm. We’ve budgeted for a vacation or summer classes and we’re carpooling, taxing, or packing the kid’s clothes for the trip to the beach. More than likely, the plans are set, and we work the calendar with a new zest for life, as the sun comes out and gives us some well-deserved vitamin D.

I’ve been enjoying bike riding, swimming at the outdoor pool nearby, and trying to soak up some summer energy. But, there has been a lot on my mind, when it comes to money. Inflation is here. We’ve been paying more for a number of things, including items related to our vacations. That includes hotels, flights, gas for cars, food in restaurants, and more. All things are not equal. Some areas of the country have experienced more inflation. Mendocino, CA saw almost $10/gallon a couple of weeks ago. So, depending on what you want to do, and where you do it, it can wreak havoc on your budget.

We haven’t seen this in years, and everyone is talking about it. It’s important, so it does deserve our attention. What causes me more concern is that there are some solid indicators that we’re heading towards a recession. The dirty “R” word. We’ve officially hit a bear market for the stock market. Things are down more than 20% which hurts. And, when you think about losing money, it brings you down. That’s why, for the most part, if you’ve worked on your portfolio and have it set up correctly, you try not to watch it, because it’s painful. But, things have bounced back in the past.

Do you remember how COVID smashed the markets, and then it came roaring back, and it recovered very quickly, and kept climbing. It’s all part of the business cycle, which we’ve been very lucky to avoid for years. The business cycle talks about 4 periods, that I like to refer to as the four seasons. Expansion, Peak, Contraction, and Trough. If you’re lucky to enjoy the four seasons where you live, you know you need some rain for things to grow. They reach a peak of beauty, then things start to turn, the trees lose their leaves, and winter hits. Then, it starts all over. For the business cycle seasons, the timing of when each season hits is not known nor fixed, as we see each season in nature. So, it’s different that way.

Ok, so the word “recession” has been on a lot of people’s minds. I’ll have to say there are some very strong pieces of evidence that say we’re clearly headed in that direction. First, what is a recession? The technical definition is two quarters back to back with economic decline. So, each quarter shows lower output, which is that crazy Gross Domestic Product calculation. Remember, we count cars produced, computers, services, and everything. If less of that is being made, that’s less economic activity as people buy less, there is less employment and less activity going on financially.

This isn’t supposed to be scary. Remember, spring, summer, fall, and winter. It’s part of the cycle. However, there is some proof that this potential “winter” may be a little more challenging. Ok, I always think of GOT, you know Game of Thrones. Not a show for kids. But, they also spoke about how “Winter was coming”. So, what happened on the show? People had to get prepared, right?

So, I don’t want any of you to be taken by surprise. Hey, our buddy Elon Musk, the founder of Tesla is actually cutting 10% of salaried employees. That means the people who get paid the same amount each week. He wants to move more people to hourly, where he can reduce their hours if needed. It’s more flexible for business. Only pay when people work. He thinks a recession is going to come and it’s going to last 18 months. He’s having problems getting all the materials he needs to build cars, which means he can’t make as much. It’s that nasty supply chain thingy. But, that affects GDP, because he’ll produce fewer cars, which reduces economic activity. Big words, but he’ll be making fewer products.

The GREAT Depression, which we went over in a podcast early on, showed bad things for 43 months which is over 3 and ½ years. That was a bad one. But, if we look at recessions since World War II, which is more current, it’s around 11 months. So, Elon thinks it’s going to be something a bit more serious than normal.

Netflix cut about 3% of its staff, which is about 300 people last week. It’s another indication that their business is slowing down. There’s that GDP thing going down again. And, people are trying hard not to buy gas, because it’s expensive. Do you remember back in March of 2020 when the average price of gas was under $2? It’s reached over $5, and I’ve heard that some think it’s going to be over $6 before the end of the summer.

Ok, so if it is on its way, what should we think about doing. The first thing to realize is we’ve been here before. We can’t forget that. All of the past information says it will end, so we need to stay calm. Sometimes I feel like a broken record saying the same thing over and over. But, I do it, so that it will sink in. I think most of us have heard that it takes 7 times of repeating the same message for it to take root in our brains and GROW!!!. I’m talking about making sure you have an Emergency Fund.

This is one of those times when we want to have access to an emergency fund. No one wants to think of the possibility of transitioning from one job to another, but would we have thought Tesla and Netflix would’ve been cutting jobs? Tesla has HUGE demand, but if it can’t get the parts to produce the cars, it doesn’t matter.

The Emergency fund is that safety net to catch you when things don’t turn your way. Yesterday, I read a survey that was published this past weekend about emergency funds. About 60% of people are uncomfortable with the amount of money set aside. That’s amazing and scary. It’s up from 45% two years ago. There are about one-quarter of people who don’t have any money set aside. A little more than a quarter have some savings, but not 3 months. 22% have three to five months, and 27% have 6 months or more. I’m hoping you have a solid emergency fund and you continue to build it. Taking charge helps, so you can help to put your mind and ease if you put your plan in place and make it happen. Remember personal finance is personal, everyone’s situation is a bit different. But your fund should be able to cover at least 3 months of your absolute necessities. Check out our video on the EduCounting YouTube channel for more.

We know money is getting more expensive. Wait, what does that mean? Well, it means that if you want to borrow it, it will cost you more interest, because rates have been going up to slow down the economy. Those rates will work their way into higher rates for purchasing a home, which we’ve seen already, and it will go into car loans, credit cards, and lots of other stuff. Credit card rates last week were just shy of 17%. That’s a tough situation and literally will cost you an arm, a leg, and your sanity. We know credit card debt is usually bad debt. Paying them off should always be a top priority, especially right now, so don’t wait. I’ve seen credit card debt that has really messed up people’s lives with stress, fighting with loved ones, and a feeling of hopelessness. It’s not pretty, and as a nation it keeps climbing.

That’s why we MUST at all costs live within our means. Living like the Kardashians, when you don’t have that kind of income, will lead you to a place I assure you that you don’t want. If you are lucky enough to be a two-income family, have you ever tried to live off one salary? I have friends who’ve done that and say it’s so empowering to know you don’t NEED both salaries, and when things are good, it helps cut years off their anticipated retirement date. Does 55 sound better than 60, 62, or say 70 as a retirement age. Heck YES, IT DOES. So, cut down on your video streaming, reduce buying those cookies at the store you don’t need and think about taking your bike to the store. Save on gas and get healthy-Double Whammy. If you can save it, why not? Now is NOT the time to be loose with your spending.

Ok, is it time to try and get a bit more income in the door? It’s always a good time for that, but when things may be getting tough, having a bit more money coming in is a good thing to SAVE, not spend!!! You have to ask yourself the question if you want to make it through this recession in a good place or potentially struggle in a bad place. If you’re a one-income family, is there any chance to make it a two-income family? There are lots of ways to make extra money online. We’ve talked about the gig economy, and maybe you can paint portraits, write blogs, or perform data analytics on the side-to name a few.

Have you seen Ryan Trahan, who is this young YouTuber who is raising money to feed America? He’s going 30 days across America to meet up with his buddy Mr. Beast and delivery 1 penny to him. It’s a challenge. Please don’t say “Who is Mr. Beast?” He’s a YouTube sensation with about 100 million subscribers on one channel and makes about $3 million per MONTH. He does lots of challenges and has a pretty serious charitable focus.

Anyway, Ryan has raised about $1.2mm already from this challenge over the last 25 or so days. He started with 1 penny and had to make money on his quest across the US to buy plane tickets to get to the East coast to hook up with Mr. Beast, his buddy. If donations for any day are over $50k, any money he had in his possession that he made gets “reset to 1 penny”. So, he has to make more to build his his cash reserve so he can eat and buy his next plane ticket. It’s pretty fun to watch. But, I learned there are apps where people need to have their dogs walked. The one he used was called WAG, and I saw Ryan walk Scout. He says he makes $20/hour and showed his earnings. It’s amazing what I can learn when Mak drags me to the couch to watch YouTube clips. The point is that there are ALL kinds of ways to make money with a second hustle, and you may like it or even get some exercise!! Kids, you can do it too!

In a recession, it feels brutal to look at your 401k and you may get a little depressed. I know, because I’ve done it. But, remember when you’re investing there are cycles. Ups and downs. It should be for the long-term. So, today doesn’t matter if you don’t need the money. It’s 10 or 20 years from now. Hard to think about, but it’s better to not look at those statements. If you’re going to make adjustments, that’s one thing, but if you’re going to let it keep going then let it go. Don’t be afraid of the bear market. Since the early 40s the average bear market lasted around 11 months, and the average bull market was over 4 years. I like that stat.

The key is that recessions happen. If we are headed into one, we need to be prepared and keep our eyes on the ball. Kids need to know things might get a little tight, so they’ll need to pitch in, whether that means not complaining when you can’t go on that vacation, to the movies, reducing some video games (I hear Grant moaning in my head) or you can’t go out to eat as much as you like. It’s a family effort. Acting as if nothing is going on, and increasing your credit card debt to support your lifestyle is absolutely not a lesson to teach the kids. We’ll see you next week for more Money With Mak & G!!! BYE!!!

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