800px-American_CashThe boom is back.  Unemployment hasn’t been lower in a very long time.  There’s some evidence that wages are starting to tick up as well.  Employee’s are having confidence to leave their jobs.  All of this is good news.  The bad new is that a recession is coming.  I don’t mean this year, I don’t mean next year, but sooner or later its going to be mass layoffs and a stock market crash. (And I mean like a real crash, not the baby pullback we’ve experienced during the last few months).  What should you do?

Don’t sell your stocks

There could be a lot more economic boom between now and the next recession.  The stock market could do any number of crazy things.  It could double before the next recession hits.  This might be the lowest the stock market gets for the rest of your lifetime, it’s probably not the highest it will ever be during the rest of your lifetime.  Our goal is to accumulate assets.  These assets will in turn provide us with more cash.  Don’t sell the assets!

Do diversify your income

If you only have one income stream now is the time to start making new ones.  It’s not as much fun to have to come up with a new way of making money if you just lost your job and you have six weeks to sort it out before you start missing house payments.  The goal, especially for folks in debt, is to be able to make your rent/house payment without racking up more debt or dip into savings.  We’ve talked about some potential ways to make money before.  If you haven’t already started working on something, now is the time.  Whatever you do make sure that you don’t rely to heavily on one client.  Contractors are generally the first to go when the economy hits the fan. Even if the economy doesn’t dip into recession this process works.  If you were an oil worker you probably would have felt more secure over the last year if money was coming in from other sources.

Keep fixed expenses small

Your fixed expenses can make life painful even if you’re able to pull in a small amount of money from side gigs.  Your income is more diversified as your fixed expenses decrease.  If your rent is $500 per month and you pull in $1000 from a couple side jobs, contract work, and dividends then you’re probably adequately diversified against job loss.  If you have the same side income but have a $3,000 house payment then you don’t have any significant diversification.  Add up your fixed expenses like house payments, taxes, health insurance premiums (keep in mind these will be higher if you lose your job), car payments (bad), credit card payments (very bad!).  Then try to make sure that you can earn about twice as much as this from work unrelated to your main source of employment.  I’ve heard the argument from high-earning engineers, that the hourly rate they can get for side work is simply dwarfed by their current job.

What about emergency savings?

You need to have some emergency savings.  You should make sure that you’re in a situation where you can get your hands on several thousand dollars in case of an emergency.  That being said, if you’re properly diversified fewer things will register as an emergency for you.  According to the Holmes and Rahe stress scale “dismissal from a job” ranks above “death of a close friend”.  Losing your job is going to be stressful, it’ll be a little less stressful if you have enough emergency savings to see you through to your next job.  The trouble is that you don’t, in advance, know the amount of time until your next job.  Instead you get to watch your pile of cash dwindle while you try to replace the job you had.  It’s stressful to try to set up a whole new income stream during this time when you’re trying to replace your career.  If you have separate income coming in the situation is substantially more comfortable as it could continue nearly indefinitely.  No melting through your hard earned savings while you try to take any job that sails by.