One striking revelation from the 2016 presidential election process was the sharp contrast between people who think the U.S. is in pretty good shape and those who feel the country never recovered from the last recession.
Politics aside, the U.S. was in an epic economic expansion until COVID-19. The longest post-World-War-II economic expansion WAS from March 1991 to March 2001 which lasted 120 months.
However, that streak was surpassed by the June 2009 to March 2020 expansion.
The government is trying to help lessen the impact of the 2020 recession, but you can’t count on it when every crisis arrives.
You are responsible for your own prosperity and happiness in good times and in bad.
When times are good, it’s incumbent upon us to reduce or eliminate the things that increase our vulnerability in the event of an economic event and loss of primary income. Or if you’re straight-up fired from your job.
The wise take precaution. Saving an emergency fund is a given. An additional more aggressive tactic is to build income streams to diversify away from reliance on your stinkin’ job.
Primary Income Source
For the majority of us, our jobs are our primary income source. When times are good, jobs are plentiful and we have our choice of opportunities. In times of slow economic activity, a relatively small percentage of workers will be laid off and struggle to find employment.
Job security depends on a bunch of factors including level of education, skills, replaceability, industry, and geography. Another factor is economic cycles and the severity of economic booms and busts.
The bottom 10% of workers (i.e. the worst employees where you work) and people in already struggling localities are most vulnerable. So doing good work and living where the jobs are, play a part in your defense against unemployment.
But that doesn’t mean it can’t be you. Ethical, smart, reliable workers lose jobs all the time.
Identify and Decrease Vulnerabilities
Many factors can make you more financially vulnerable in the event of an unexpected job loss. You’ll be better off if you identify and address the vulnerabilities well ahead of time. I’ll highlight three that come to my mind first.
#1 Not Having A Plan
Every once in a while, you should be asking yourself, what would happen to me and my family if I lose my job today? I know it’s not on the top of your to-do list. But it will help you identify where you can make improvements in a “scorched earth” scenario.
Take stock of all your assets and determine how long your cash on hand will last you. Then figure out the same if you liquidate portions of your investments. Personal Capital is the perfect tool for this exercise because you can see all your accounts in one place. I check mine almost every day.
Having at least a minimum plan or basic idea of a game plan goes a long way.
#2 High Cost of Living Relative to your Income
If you live paycheck to paycheck, your lifestyle will take a serious hit if you lose your job. On top of that, you’re broke because you didn’t save any money while you were working.
The remedy for this is to live on much less than what you earn no matter how strong the economy is. Then save and invest what you don’t spend every month.
By constructing a life of happiness without the need to spend a lot of money, the impact will be less when there is less money to spend.
#3 Debt and Recurring Payments
Using debt to buy a car and a house requires monthly payments to service the loans. Recurring monthly payments decrease cash flow when you have a steady job, and crush your savings when you don’t.
In the event of a job loss, those payments don’t go away unless you sell the car or the house. For any credit card debt, there’s probably no accompanying asset to sell to pay it off. So you’re stuck paying abhorrent rates of interest.
The emergency fund will disappear quickly when there are payments to make.
By both eliminating debts and shrinking recurring payments while working, you’ll be less of a victim if a job loss should occur.
If your housing costs are too high, you might even want to consider moving to help you achieve financial independence, or at least to dramatically lower your monthly payment obligations.
Create Strong Cash Flow to Enable Investment and Passive Income
Before you can build income streams, you need to unlock money to invest. The typical pattern of young workers is to spend and spend, funding a “happy” lifestyle of acquiring things through debt or recurring payments. If you’re young and just starting a career, don’t fall into this trap.
The middle-aged are often already neck deep in this quagmire. If debt and recurring payments have taken hold of your cash flow, it’s time to take personal responsibility and change shit up.
Reduce and eliminate debt in the short-term to boost long-term cash flow. Cut the cable bill or any subscription that’s weighing you down. Know where your money goes every month to avoid leaks (i.e. create a budget).
Excessive debt makes you vulnerable to a loss of income from employment. Recessions can be brutal. Three to six months of emergency cash may not be enough. The less debt and recurring payments you have, the longer you can weather the storm.
Eliminating absurdly high-interest debt is first in order. Pay off what you can as soon as you can. If repayment will take a while. Refinance. Plenty of tools can help.
But refinancing is only a tool to help save you money. Total payoff should be the goal.
The next order of business is debt that is crippling cash flow. Namely, debts with high payments. My old car loan rate was only 0.9%, but the payment of $563 was killing me. So I eliminated it (for good).
If you own a home, refinancing your mortgage is a powerful (and low-risk) maneuver to free up cash flow. We refinanced our home for the second time a few months ago and it freed up almost $300 per month. I used LendingTree during the process to find the cheapest rates.
Or get extreme and downsize to a smaller home or switch to renting.
If you haven’t bought a home yet, make sure you’re 100% ready, take your time, and don’t stretch to buy something you can’t afford.
How to Build Income Streams From Powerful Cash Flow
Once you’ve decreased and eliminated debts and wasteful outflow of cash, you can take the positive cash inflow and invest in various places.
The best income streams are passive (hands-off). Few, if any, income streams are entirely passive. But wise investments that produce income and are easy to monitor hit the sweet spot.
For quick wins, I wrote an eBook called 6 Easy Income Streams You Can Start Building Today! (click that link to subscribe to RBD and get the eBook for free). The six streams I write about in detail are:
- Invest in dividend stocks
- Invest on real estate crowdfunding platforms
- Invest in low-fee dividend paying ETFs (M1 Finance is the best broker for this)
- Move idle cash to a high-interest savings account
- Buy bonds (boring, and out of favor now, but that will eventually reverse when rates increase)
- Start an online business (not passive immediately, but it’s surprisingly cheap and easy to start a WordPress site from which you can build a business)
After you start building the easier income streams, and when your cash flow strengthens further, you can focus on more powerful income producing assets.
Rental properties are a solid way to grow wealth and build income streams. I owned a rental for about 8 years.
Buying your first property is often a learning experience. So read books on the subject before you get started to avoid beginner mistakes.
As your wealth grows, you may want to look into real estate crowdfunding with a service like Peerstreet or Fundrise. Both enable you to invest in real estate projects that are run by other contractors and investors, making it relatively hands-free.
While I prefer passive income streams, entrepreneurial types can build side hustles to earn extra income. My favorite resource for extra income inspiration is Side Hustle Nation. It’s a blog a podcast on the subject where every week there’s new ideas for creating “job-free” income.
Chief Side Hustler, Nick Loper, has a new book on the subject of side income streams called Buy Buttons: The Fast-Track Strategy to Make Extra Money and Start a Business in Your Spare Time, which has hundreds of ideas to make extra cash on the side.
When you build income streams outside of a primary income, every new passive dollar you earn decreases your reliance on your day job. Side hustles further diversify your income, and can even turn into a full-time business.
As an adult, I’ve lived through two major recessions. For the first, I was backpacking in Asia and Latin America and barely felt it. For the second, I suffered from a property that lost 10’s of thousands of dollars in value. The memory is painful. But I stayed employed.
The economy has been favorable for the past few years. Not awesome, but not terrible. Unemployment is around 5%. A recession is probably not on your mind these days.
But the recent election reminds us that the status quo doesn’t last forever in politics or economics. As each month of expansion passes us, it becomes more likely that a recession is near. The stock market is near highs, and there are signs of frothiness in certain real estate markets.
Asset prices could certainly continue higher for a while and unemployment may continue to drop. I hope so!
Because the longer the economic prosperity continues, the more I can prepare for negative economic growth.
When the next recession arrives, I hope it’s a mild one. But based on my experience, those don’t seem as common anymore. This time around, I’m preparing for the worst by decreasing vulnerabilities in my financial life and planning for what I’ll do if I lose my job. Especially now that four other people rely on me.
There’s no downside to taking this approach. Lowering living costs and working to build income streams helps prepare for early retirement anyways.