The Hard Thing About Tough Choices
No. 35
Why Read?
Now is the time to prepare for a possible recession
Don’t give up on saving for the future
Make tough choices now
This year is shaping up to be one of the biggest for corporate bankruptcy filings in over a decade, due to a mix of economic troubles hitting already wounded companies. A slowing economy, rising interest rates, and persistent inflation are largely to blame. Many of these companies are loaded with debt that they are having difficulty repaying, which foretells more cost-cutting, layoffs, and possibly bankruptcies later this year.
But it’s almost summer when thoughts turn to the beach, the lake, the mountains, and brunch outdoors with friends all checking their phones to see if anyone they know is having a better time than they are at that moment. Sometimes it feels to me like there are many people who seem to not care about what is around the next corner, preferring to remain blissfully ignorant about the future. This is not to say that you should be frozen with anxiety about what’s next, but at least admit that you must plan and execute the plan to prepare for whatever comes next.
Many companies are going to slow their growth, and many will fail. What that means for you is slower wage growth at best or unemployment at worst. This wishful thinking about where the Federal Reserve will take interest rates is just that, wishful. Despite raising rates ten times the job market remains tight and inflation while slowing is still high. Sure, the Fed may pause rate hikes, but my money is on continued hikes later this year. So be prepared.
Inflation has already eaten into your savings. I keep hearing people say that it is impossible to save or make ends meet. In some extreme circumstances, this may be true, but my guess is that if you read this newsletter, you aren’t working a minimum-wage job.
Belt Tightening
Someone once said to me that the true sign of maturity is being able to forgo short-term pleasures to achieve long-term goals. Let’s look at some realities. First, inflation isn’t going away anytime soon so your expenses will continue to increase. Your rent will continue to increase. If you have debt that has a variable interest rate (e.g., variable rate mortgage, credit card debt) payments are going to increase. Even in a tight labor market, you may find yourself unemployed for a bit. The time to prepare is now.
Reduce large expenses. In a world where houses are larger and families are smaller, most of you grew up with your own room and even your own bathroom. If you want to continue to live in the same neighborhood, you may have to consider a roommate(s). If you don’t have to commute, consider moving to a less expensive area. If you do have to commute, consider moving to a less expensive area.
Dine out less. Learn how to shop and cook. If you live in a major city you’ve probably noticed an increase in the cost of an entre at your favorite restaurant. You’ve likely also noticed additional surcharges for hospitality or kitchen staff. And then there is the increase in tipping culture. Dine out less. Cook more. Get smart about where and how much food you purchase to cut down on waste. If you don’t know how to cook it may be time to learn.
Consolidate and eliminate. Why do you have a Peloton and a gym membership? A lot can be accomplished with a Peloton membership and a yoga mat. A lot can be accomplished with a yoga mat and YouTube! Walk or run with friends.
Don’t give up on building for the future. Whatever you do, do not stop saving and investing for the future. Always pay yourself first. Do not cut your 401k or equivalent savings in favor of maintaining your current lifestyle.
If you have a good savings hack, please share it in the comments.
Recessions happen. It is a normal economic occurrence and not a reason to profess your love of socialism. It is true that many Americans cannot put their hands on $400 dollars in the event of an emergency. That is not a consequence of capitalism. It is likely the cause of poor past decisions. There are those who sometimes fall on hard times due to no fault of their own, however, the wonderful thing about democracy and capitalism is that you can get second chances. Make good decisions now about savings and expenses.
Hope for the best and prepare for the worst but remember that hope is not a strategy. Nothing changes if you don’t make changes.