The “R” word is sadly becoming more common. It’s hard not to hear or read it in the news and your own inbox. I’m talking about recession. I’m not trying to sound like a doomsdayer, but you need to start preparing for a recession.
Unfortunately, with our current financial system, we have good times (like now) and bad times (the 2000 Dot-Com Crash, the 2008 Great Recession, the next recession).
This year-2019-might be the last good year, you have to get your financial ducks in a row. My wife and I got serious about preparing for the next recession back in 2015 when I quit my job to accomplish the recession prep secret I’m sharing with you today.
Why did my wife and I turn our lives upside down during one of the longest economic expansions in human history?
It’s simple….we want to be debt-free when the next recession finally comes.
If you have the same sick, gut-wrenching feeling when you hear the word recession, I’m glad you’re here. Today, I’m going to show you how we got out of debt and what you can do to escape the debt monster.
Being debt-free when recession strikes doesn’t guarantee you’ll escape the debt-storm unscathed. But, you stand a better chance.
How I Got Out of Debt
It wasn’t easy, but my wife and I officially got out of debt in the spring of 2017. Our debt-free path isn’t going to be the same journey you pursue. We all have unique lives and different tools we can use to get out of debt.
But, this is how we achieved our goal of preparing for the next recession and became debt-free.
Make Extra Monthly Payments
At a minimum, you have three different options to get out of debt:
- Pay cash or debit for every purchase. Stop borrowing money or adding to your credit card balance
- Make extra monthly payments.
- Pursue options 1 and 2 at the same time.
For me, making extra debt payments whenever possible was priority #1 as soon as I graduated from college in May 2008 with $50,000 in student loans. Thankfully, my job had a relatively high income for where I live, so I had more disposable income to play with.
Instead of buying a new $30,000 car or a large, new house I really didn’t need, I did these three things instead:
- Build an emergency fund with six months of living expenses
- Invest 10% of my annual income for retirement
- Make extra monthly debt payments (start with the highest interest rate first)
Before you make extra debt payments, make sure you set aside enough cash for the future. Then, with any spare income, consider putting it toward your current loans.
For me, that was student loans, a car loan, and eventually a home mortgage ($150,000 in total debt in 9 years).
This tactic helped us save thousands of dollars in interest payments. And, having more financial peace of mind since we know we don’t have to make (yet) one more monthly debt payment each month.
Tools I Used to Make a Debt-Free Plan
So I knew how much extra money to spend each month on debt payments, I used these tools:
- Expense Tracking Spreadsheet (to see exactly how much free cash I have)
- Pay Off Debt App (to see which loan saves you the most money with extra payments)
Once I could see on paper how much I could save by making extra payments, I wanted to pay more. That probably sounds weird. But, I hate debt. Maybe I dislike it a little too much.
Spend As Little As Possible Each Month
Let’s admit it. Extra debt payments are pretty boring. You’re probably not the life of the party when you bring this topic up with friends and family.
So, it can be easy to want to spend your hard-earned income on things and experiences. Or, even if you’re not a frequent spender, you spend big money on quality items when you do open your wallet. For example, you buy better brands like Under Armour, Starbucks Coffee, or getting a leather couch instead of a cloth couch because of the better product quality.
Use Trim to monitor your spending and help cancel subscriptions you no longer want to spend money on.
One valuable lesson (let’s call it a virtue) is moderation.
Many of us lack this character trait. Hence, it’s why so many of us are overweight, rent self-storage lockers, and have enough clothes to last three lifetimes. Before you get mad, I can lose 10 pounds myself and we make thrift store donations at least twice a year to declutter.
Cutting spending is the one-two punch to get out of debt fast.
Here’s how we kept our monthly spending to a minimum so we had more cash to make extra debt payments:
- Shop Craigslist instead of buying new
- Wait until something breaks before replacing or upgrading
- Cook meals at home
- Don’t invest more than 10% of your monthly income, until the high-interest debt is paid for
What Simple Debt-Free Living Looks Like
Now that we’ve been debt-free for almost a year, here’s a glimpse of how our financial lives have changed:
- We save for large purchases
- We continue to shop Craigslist and eBay first
- Pay our bills in full each month and (most months) can still put money into savings
- Our spending has increased, but we’re not going back into debt
Having to live on $35,000 a year is one reason why we worked harder to get out of debt. The peace of mind of being debt-free is more serene when you make less money, hate your job but can’t afford to quit, or earn a variable income.
Now that we’re debt-free, we could easily use the money we spent on debt payments to buy more things. But, instead, we save more, invest more, and even donate to charity. And, we still keep our monthly expenses as if we make $35,000 a year. Although, we earned more than this amount in 2018 and 2019.
If recession strikes in 2019 or 2020 and our income returns to the $35,000 range, we’re prepared.
Watch Out for Lifestyle Inflation
Yes, our monthly spending has increased some and we take a little more expensive vacations. For instance, we rent a vacation home with more amenities. And, we travel to new destinations instead of having a staycation or staying at a relative’s house to avoid lodging costs.
We still think we’re keeping lifestyle inflation in moderation so we’re not too concerned.
Live humble. Live simple. Be content with what you have. Especially if you already have a house full of stuff.
Other Ways To Start Preparing for a Recession
I think getting out of debt (or as close as possible) is the best thing you can do before the recession comes. This is especially true if you don’t have firm job security. During 2008, I saw too many co-workers ruin their credit because they had lots of debt and suddenly found themselves laid off and couldn’t fully replace their income in a new job.
Besides living within your means, consider pursuing these actions as well. They may come in useful.
Keep 30 Days Food On Hand
I’m not trying to be like a prepper, but it’s a good idea to have extra food at home. Look no further than furloughed federal workers who are going to local food pantries because they don’t have food at home.
U.S. government jobs are some of the most secure, recession-proof jobs over the last 100 years. Most of these jobs come with retirement plans, paid vacation, and backpay for when the shutdown ends. These are benefits that an increasing number of private sector workers don’t have.
Yet, people who we perceive to be “financially secure” on the outside, actually aren’t.
So, do yourself a favor, and buy food to keep in your pantry.
Network with Friends and Co-Workers
Take the time to network with friends and coworkers. If you (or they) lose their job, networking can mean find a new job sooner.
Even you both keep your jobs, it can also mean saving money on expense house or car repairs as they may have a friend who does legit work for cheap. This helps save you money on unplanned expenses when money’s tight. And, you can help the person doing the work make a few extra bucks too.
Get a Side Hustle and Save Your Extra Income
If you have free time, consider getting a side hustle to make extra money.
This might not work if you already work 60+ hours a week. But, you might be able to find some one-off projects on the weekends.
Instead of spending the extra money, put it into savings or make extra debt payments. Either way, you’re boosting your future net worth.
Trust me, being debt-free is awesome. I don’t know how bad the next recession will be. But, having our expenses at a minimum now means we don’t have to make “hard decisions” in the future. And, we’re more likely to keep our credit intact which can pay dividends down the road too.
Do you agree that being debt-free before recession strikes is very important? Why or why not?