How to Make a Recession Proof Budget

 

Over the past few years I have watched dozens of videos and read hundreds of articles by financial experts doling out their latest advice on investing and the state of the stock market. For the most part the advice has been the same: SELL.

I’ve even had close friends and family tell me that there is no question that the market is about to crash and that I need to sell all my stock, hold cash, and wait for the market to bottom out before re-investing.

These days, I can’t listen or read anything about the financial state of our country without hearing this message blasted across any medium.

Look at the dates on those articles. For a few years now, people have been trying to predict the recession.

I’ve ignored their advice.

Eventually one of them will be right. Maybe it will be the student loan crisis, the auto loan crisis, the sheer amount of consumer debt, or the beginning of another housing crisis. It could be any one of these or a black swan event we are unable to predict.

The hole in their logic is that it is next to impossible to predict any of the following

• When the market will peak
• When the market will crash
• When the market will hit its low
• When the market will start to rise again

Sure there are indicators that point to a recession, but there are also indicators that show this is the strongest the US economy has been in years.

I’ve learned to simply tune out the noise and I’ve been able to do this without worry.

In fact, I have zero concern for myself if the market were to tank this month, this year, or in 5 years.

To take it even further… A stock market recession in my 20’s while my wife and I are earning a dual income without kids would be the greatest thing for our retirement and savings. We would be able to take advantage of market lows for a couple of years, maximize our investments, and then watch them grow and compound for years on end.

That being said, I don’t wish for a recession like some of my colleagues in the finance blogging world.

Recessions and depressions are nothing to celebrate or find joy in. Millions near retirement will wonder what they will do. Millions will lose their jobs. A financial catastrophe is one of the leading causes of suicide.

None of that is worthy of celebration.

But those of us who are invested in the stock market must face a stark reality.

A Recession is Coming

Eventually those who claim the market is about to crash will be right. The market will eventually crash and there is almost no way to prevent it or avoid it. However, the best advice you can get is to ignore the noise, be excellent at your job, save money, and make no attempt to time the market.

Historically, the stock markets has both ups and downs. For the past 8-9 years, we have been riding an extremely strong bull market. People who have invested in the market through this time have seen incredible gains.

The problem is no one can really know when the next crash will be.

But what can you do to prepare for the next recession? What should you be doing?

The best time to start preparing for the next recession is now. There are a number of steps you can take such as beefing up your emergency fund, creating multiple income streams, and excelling at your current job.

I’m currently writing a guide that will outline how to live a recession proof life, but for now, I want to share one small strategy my wife and I have taken to prepare for the next recession.

Why you need a Recession Proof Budget

For many people, 2008-2010 were some of the worst years of their lives as they saw their employment disappear nearly overnight. Millions of people across the country of every age, gender, and industry saw their jobs disappear nearly overnight.

In fact, in the two years starting September of 2008, the US economy saw nearly seven million jobs lost. Certain industries were certainly hit harder than others, and while we are confident in our current jobs, we wanted to take a few steps to prepare just in case.

My wife and I have been using Mint as our primary budgeting software. It has been instrumental in helping us set up, stick to, and ultimately execute a monthly budget. The budget we follow each month is pretty lean. We live simple lives. Our goal is to save and give as much as we are able to while preventing our lifestyle from inflating with our income more than it needs to.

A few weeks ago I asked myself a tough question, “If I lost my job tomorrow, how much more could we cut? What are the areas of fat in our budget? Where can we find more savings? Is it worth it to cut even more than we have?”

Essentially, I wanted us to drill down and find the bare minimum amount of money we need each month to get by. How little could we live on and still break even each month?

When you set your mind on reaching financial independence, you make the necessary sacrifices to reign in your spending. But the truth is, most of us, even with already-lean budgets, have areas we could cut but choose not to.

• My wife and I love to eat out.
• I have a gym membership and spend too much on overpriced coffee.
• She likes to renovate furniture and buy gifts for friends.

These things come at a cost, not only in dollars but in time spent working.

For us, they are worth it.

But what if one of us lost our job tomorrow?

We would cut these small luxuries.

How to Make a Recession Proof Budget

One of our financial goals for the rest of 2017 is to put ourselves in a position that is as “Recession-Proof” as possible. We want to have security in our jobs, security in our investments, and security in our ability to save.

One aspect of this is understanding exactly how much we need each month to get by–the absolute bare minimum.

We created a Recession proof budget, otherwise known as a “Slash and Burn” budget. Essentially, we went through our budget item by item and asked ourselves, “If worst came to worst and we both lost our jobs, could we get by without this? How frugal could we live if life brought us to our knees?”

Do you know that number?

Knowing this number has given us an extra layer of financial peace.

Our monthly expenses all together come out to $2,687

Our “Cut-List”

Below is a list of everything that we decided we could sacrifice in order to be at our almost bare minimum budget. This would allow us to keep paying for wifi and books for Seminary. After going through this exercise we may decide that some of these areas are not worth the price we pay for convenience or pleasure.

• Monthly allowance $100
• Gym membership $78
• Gifts $40
• House Additions $50
• Dollar Shave Club $2 average monthly —add note about pre-tax income below image above
• Food $100
• Costco $5 average monthly
• Eating out $100
• Dry cleaning $10
• Laundry $25 we use a laundry facility but could drive to friends/family
• Christmas $50 we set this aside each month
• Missionary Support $50
• Website $10 average monthly

After going through our budget and making the above, imaginary budget cuts, we calculated that we could lower our monthly spending by $620 to a bare minimum of $2,067 to get by each month, which includes a $328 car payment! A year from now when the loan is paid off, our minimum will go down to $1,739.

With this number in mind, we are extremely confident in our long-term financial security. If either of us lost our full-time jobs, the other’s would still cover our monthly expenses. Plus, with our side-hustle we have an extra $800-1,000 coming in each month not included in our income on Mint.

As we mentally prepare for a possible eventual recession we have an extra level of financial safety because we know exactly how much we need each month to get by without dipping into our savings. We know how much we can get by on if things get desperate.

We also have a goal to work towards…

How can we create multiple streams of income outside of our current jobs that can cover our monthly expenses?

Wrapping up

If you’ve never gone through the process of actually making a budget, then I highly recommend checking out my favorite budgeting guide by Jeff Rose, “How to Make a Budget that Actually Works!“. Follow the steps he outlines and  get yourself on track and on a budget. After you have a better idea of what your current spending looks like, take the time to follow the simple steps above to create your own recession proof budget. 

This is one of the simplest and most powerful levers you can pull for yourself and for your family to earn more, save more, and give more.