A Millennial's Guide to a Recession

If we had to guess what your age is, we would assume it’s somewhere between 24 and 39.  Why? Because Millennials are one of the largest living populations in the US.  If you don’t identify with this group, it’s likely you are a Baby Boomer (54-72 years old and the 2nd largest generation) who may have millennial children. Regardless what generation you are a part of, you know someone who is a millennial.  The purpose of this guide is to educate our fellow generation. A Millennial’s Guide to a Recession is a must read in times like today.

Millennial Prosperity

The Great Recession ended in 2009.  That means the millennial generation was between the ages of 13 and 28 when last our recovery began.  During the recession, the youngest millennials were focused on the social complexities of middle school.  The oldest millennials were young professionals trying to make their first sums of money. What this means is that for most of our adult life (Natalie and I are millennials) we have been able to thrive in a time of economic prosperity.  According to the Washington Post, from 2010 to 2019, the S&P 500 (which measures the largest American companies) had a total return of 256% (13.5% annual average).  If you had invested $10,000 at the beginning of 2010 you would have ended with $36,000 at the close of the decade. As investors, we could select investments without any true rationale and make money.  Those were the days… We had the privilege of starting retirement accounts, buying homes, and earning higher wages in a growth oriented economy. Businesses and consumers were flush with cash and that helped drive the economy even higher.  

But now with an economy impacted by the coronavirus, we need to understand the other side of the economic cycle, a recession.

What is a Recession?

A recession represents economic slowdown.  By definition, it is two consecutive quarters of negative economic activity.  Economic activity is measured by GDP (Gross Domestic Product) which is the total value of goods produced and services provided during the year.  According to the National Bureau of Economic Research, to declare a recession, the slowdown needs to last for “more than a few months.” Therefore, we can’t technically label this as a recession yet.  Only time will tell.

What we want to highlight is that a recession is part of the natural economic cycle.  We’ve heard from our friends multiple times how what we’re experiencing today is nothing like we’ve seen before.  To an extent, that’s correct. Each economic downturn is unique. However, we have seen market declines and economic slowdowns multiple times.  What we are experiencing today was inevitable. No one could have predicted why a slowdown would happen, but every financial and economic professional could predict that a recession would eventually occur.  The chart below helps us comprehend the unavoidable:

We want to use our educational and career background to help guide the younger professionals during this uncertain time.  So, the next part of our Millennial’s Guide to a Recession includes tips on emotions, emergency funds, debt, budgeting, portfolio allocation, and retirement planning during a recession.  Each category has both Dan and Natalie’s commentary, and a summary of their key points for each topic.  

Maintain Your Emotions

DAN:

This is a strange and difficult time for most people.  You don’t know when you’ll be able to socialize again or even if you’ll be employed in a few months.  Natalie and I are dealing with it ourselves as small business owners. Our recommendation during this time is to be patient and breathe.  Invest in yourself through self care items, learning a new hobby, or hiring experts to delegate the burden.  Because ultimately, this is the time to do it!  For example, I’ve been meditating lately because my mind wonders so much.  However, I knew I couldn’t do this on my own so I purchased Headspace to help guide me.  Why? Because I tend to focus on the past and future; what could I have done differently? What should I be doing?  The practice of meditation reminds me to stay present.  I’m not suggesting you begin meditating, but I will suggest that you stay present.  

NATALIE:

I crave social interaction.  It’s my way of destressing and keeping my mind off things.  If I don’t have conversations with others, I tend to sulk in unlikely and negative outcomes.  Therefore, being on lock down means I have to try hard to still have connection with my network.  My advice? Create virtual meetups with friends and coworkers. Another solution, go on a walk outside and just start calling your people.  Yes, some of the conversation will be about the virus, but challenge yourself to talk about something else. What new recipes have they tried?  What books are they reading? What’s a good board/card game to play with a small group?  

The other piece of this is maintaining your emotions with your spouse, family, and other persons you share a roof with.  You HAVE to keep open communication. Share with each other your stress and anxieties. More importantly, listen with empathy rather than solutions.  

SUMMARY:

• Invest in self care

• Learn a new skill or hobby

• Delegate parts of your life that experts can help out with

• Stay present 

• Have virtual social interactions with friends and family

• Get outside!

• Maintain open communication with your partner, roommates, and family

Emergency Fund

DAN:

40% of Americans are not able to fund a $400 emergency or unexpected expense. An emergency fund is a safety net in the form of liquid assets to cover basic living expenses.  We recommend that Millennials maintain between 3-6 months’ worth of living expenses. Living expenses are defined as your non discretionary budget items. Think of it as your needs versus your wants.  Non discretionary expenses would include (but not limited to) your housing payment, utilities, groceries, toiletries, gas, and debt payments.  

Your emergency fund is in case you or another member of your household loses their job for a few months.  It also is there in case an unforeseen expense comes up such as a car repair. Go in with the mindset that you won’t know why you need it, you just know you will eventually need it.

NATALIE:

It’s times like these why professionals preach the importance of an emergency fund.  The fact is, if you haven’t built up your savings by now, it is likely going to be very difficult to do so in the near term.  Emergencies can be self inflicted or completely out of your control (like today).  If you are a small business owner, you need to run your business finances like your personal situation.  There should be an emergency fund for the business, too.  

The amount of your emergency fund will depend on what type of job you have as well as your sleep-at-night factor.  For example, Dan and I own a business together, and I want as much time as possible to get out of a bad situation. Therefore, our emergency fund is 6+ months worth.  This is a conversation you and your partner have to have together. Even if you both have your jobs, and it will likely stay that way, knowing your minimum savings amount is vital.  

SUMMARY:

• An emergency fund needs to be liquid and easily accessible

• Emergency funds should be between 3-6 months of living expenses

• Living expenses include rent/mortgage, utilities, gas, food, toiletries, and debt payments

• Your specific savings amount will likely depend on your job and comfort level

• Discuss with your partner the amount you both feel comfortable with

• Remember to create an emergency fund for your business as well as your home

Debt Payments

DAN:

Once you’ve built your emergency fund consider paying down debt faster.  Minimizing your required payments is extremely satisfying and freeing. When a recession comes, it is so much easier to stay afloat when your debt obligations are minimal.  As you minimize your debt, you’ll start to free up cash flow for other financial opportunities such as investing for yourself or your children. Do not take on additional debt during a recession unless it’s the last possible resort, or you know you can still manage the payments if a reduction or loss of employment occurs.

NATALIE:

Most of our clients’ largest debt payments are their home and/or student loans.  In the event of a recession, both institutions will be very mindful that people are struggling to make ends meet.  Do not hesitate to reach out to your mortgage lender or student loan provider to come up with a temporary solution.  Most providers are willing to make arrangements to help you. As a former banker myself, the worst thing a customer can do is ghost their lender.  If you call and explain your situation and simply ask for help, you are well on your way to better days ahead.

SUMMARY:

• Minimize debt payments prior or during a recession

• Do not take on additional debt during a recession

• Reach out to your lenders if you are struggling to adhere to your debt obligations

Create Your Budget

DAN:

Your budget is what drives all of your financial decisions.  With the prospects of a recession looming it is even more critical to develop a ‘what-if’ budget that looks at your expenses should you or your partner lose employment.  Start with your net take home pay. From there, list your savings, debt obligations, fixed expenses, and finally the leftovers for variable expenses (like clothes, restaurants, and gifts).  This will provide clarity on what your essential expenses are (and will help you determine that emergency fund we were just talking about!). In the event of a reduction or loss of income, you can quickly assess your cash flow and make adjustments to the budget you created.  Think about how difficult it would be to lose your income, and then have to figure everything out!

NATALIE:

Dan said it best, “your budget is what drives all of your financial decisions.”  How do you know how much you can invest without a budget?  How do you know you can afford that vacation without a budget?  You really can’t. You just make assumptions. And you know what happens when you make assumptions.  People say budgets are constraining.  No, it’s actually the exact opposite. They provide freedom, clarity, and transparency.  Aren’t those the three things we crave most during uncertain times? “I don’t have time to create one.”  Shush. Yes you do! You're on your phone 1-3 hours a day. It’s all about priorities. During a recession, prioritizing your financial situation is what separates the winners and losers.  

SUMMARY:

• Your budget is what drives all of your financial decisions

• Figure out what your essential expenses are to quickly assess your cash flow plan in the awake of a recession

• Budgets are not constraining; they provide clarity, freedom, and transparency

• Everyone has the time to create one, not everyone prioritizes this major part of their life

• Those who financially prepare for a recession come out ahead when it's all said and done

Diversify Your Portfolio

DAN:

The first key to having a diversified portfolio is having enough cash in a liquid account to use for an emergency.  Your portfolio diversification should be based on your risk tolerance. Ask yourself if you are an aggressive investor (80-100% invested in stocks), moderate investor (60-80% invested in stocks), or conservative investor (60% or less invested in stocks).  As a millennial, our advantage is that we have time on our side before we need to use the money within our investment accounts. A longer time-horizon means that we are able to weather recessions (yes, there will be more). It is key to stay focused on your long term goals.  If you don’t need your funds for 20-30 years, why make a decision based on a short term event?  

NATALIE:

Dan and my net worth consists of cash (for our short term personal and business needs) or stocks (for our longer term needs).  Yes, when I pull up our investments it’s a total bummer to see them down nearly -30%. But, then I ask myself, who the heck cares?  I don’t need that money now, I know the market will recover, and it’s completely out of my control.  What is absolutely in my control (and our clients and readers) are the decisions we make today.  I am making an extremely active decision to stay invested.  If you are too, then give yourself a high five!  It’s not necessarily an easy decision.  

The other part of your allocation to discuss is your allocation within stocks and bonds.  We recommend not holding more than 10% of your net worth in one stock or bond. One stock can go to zero, the overall market never has and likely never will.  Make sure if you allocate your investments in stocks, it’s diversified within that category: US, International, Small Companies, Large Companies, Technology Sector, Healthcare Sector, etc.  Dan wrote a great article regarding asset allocation between you and your spouse, check it out!  

SUMMARY:

• Before investing, make sure your emergency fund is built up adequately

• Match your overall portfolio diversification (cash, bonds, cash) with your risk tolerance

• Millennials have time on their side to weather recessions now and in the future

• The market movement may be completely out of your control, but you do have authority to make active decisions on staying invested or selling out 

• Review your allocation within each of your cash, bond, and stock investments

• Make sure you don’t have more than 10% of your net worth associated with one stock or investment

Retirement Plan

DAN:

Do not stop contributing to your retirement account during a recession.  The only reason you should stop or reduce your contribution percentage is if you need extra cash from your paycheck to cover living expenses (if you have an emergency fund, you shouldn’t have to do this).  As equity and fixed income prices fall during a recession, your periodic contributions purchase more shares at a lower price (see this article on Dollar Cost Averaging).  Think of it as buying at a discount.  Purchasing at lower valuations allows for greater long term growth potential.

NATALIE:

You’re buying stocks on sale!  Keep going! This is the worst time to stop contributing to your retirement plan.  If you only participate in the market when it feels good, you likely will only be buying in when it’s most expensive.  Yuck. Your time horizon between now and retirement is key. If you have 20-30 years, you will likely want to have at least some exposure to the stock market.  If you don’t, that’s fine, it just means you have to save a heck of a lot more money. In the next 20 to 30 years, we will likely experience market declines of -20% or more at least 4-8 more times!  These significant market declines happen on average every 6 years.  Why is that hard to believe? Because that’s the average. What we just experienced is an outlier to the average.  Our last significant market decline was 11 years ago.

SUMMARY

• Don’t stop contributing to your retirement accounts during a recession unless you need those contributions for cash flow needs

• Your periodic contributions purchase more shares during a recession

• You are buying shares of stocks and bonds at a discount during a recession

• Understand what your time horizon is between now and retirement, is it 5 or 30 years away?

• Market declines over -20% happen every 6 years on average 

Final Thoughts

It’s important to understand that a recession is part of the normal economic cycle.  This is a difficult time and we need to focus on the importance of developing a long term financial plan.  Seeing our hard earned dollars increase with the market has been fun, but it can’t go on forever. Setbacks occur in the market and the economy.  The sooner we all accept that, the sooner we can directly plan for events like today. We’re here to help guide you, and walk you through each step of the way.

Stay calm, stay invested, and we will get through this together!