For the Well-Prepared and Fortunate, Recessions Can Present Opportunity
Yes, playing defense comes first, but bargains abound during slack economic times
The first rule of living through a recession is to make sure your household can withstand the challenges. Having a large emergency fund is the foundation of recession survival. It’s the cushion that gives you time to rebound from a layoff, reduced hours or lower commissions.
At the same time, a recession can also be a great time to go on offense, if you’ve planned well and are fortunate.
In a recession pretty much everything goes on sale.
For renters who’ve been frustrated by the rapid rise in home prices and unable to crack through multiple-bid mania, the tables turn in a recession. Price gains slow down — and may even reverse — and the pool of buyers shrinks, as most people are spooked (or unprepared) for a recession. Typically, mortgage rates also fall, increasing your buying power.
Car dealers are hungrier to make a deal, as demand slows and lots grow full.
Contractors too busy to return your call during boom times become eager to tackle your remodeling project.
Been waiting to take a special vacation? Deals on travel and accommodations are going to be more plentiful, and, depending on where you’re headed, the crowds (at least of fellow Americans) will be thinner.
Still, spending money you don’t have to in a recession can seem crazy.
The reality is that while unemployment rises, the vast majority of Americans do not lose their jobs in a recession. Yes, the last recession was vicious. Even so, according to the Labor Department’s data, fewer than two in 10 workers lost their job or were working fewer hours than they wanted. The aim here isn’t to minimize the pain of what the Great Recession inflicted, but to inject some perspective that, even in that rough period, most people kept their jobs.
If you find yourself in a secure job when the next recession hits, having your finances in great shape can make it possible to take advantage of “sale” items.
Here’s how to prepare:
Get your credit score as high as the clouds. If your intention is to borrow money for a home purchase or a car, keep in mind that lenders are going to be extra focused on making sure you are a good credit risk. A FICO credit score of 700 is fine. But in a recession, maintaining a credit score in the upper tier, at least 740, helps. (FICO scores range from 300 to 850.)
Push your existing debt as low as possible. You also want to show up with as much income and as little existing debt as possible. Doubling down on reducing unpaid credit card balances, and paying down other loan balances will improve your debt-to-income ratio (DTI), which lenders focus on. Of course, you can also improve this ratio by bringing in more money between now and the next recession. Maybe some extra projects at work or a temporary side gig. Or having a stay-at-home spouse take on some paid work.
Have extra cash handy. Even if you’ve already got the emergency fund polished off, having more cash might make the difference in taking advantage of a recession.
If you’re looking to borrow money, being able to make a bigger down payment always helps your odds of getting your loan application approved, and that’s even more true in a recession. For example, you still might be able to qualify for a 3% or 3.5% low down payment mortgage for a home purchase, but showing up with 5% or even 10% is going to make your application all the stronger in a recession. And the bigger the down payment on a home or car loan, the more likely you will be offered a better interest rate.
Or you may want that extra cash to buy some retirement on the cheap. Recessions typically involve a bear market for stocks. If you have at least 10 years until you retire, a bear market should be viewed as a blow-out sale.
You have heard the investment mantra of “buy low, sell high,” right? Well, a bear market in the midst of a recession is when you can buy low. If you are saving in a workplace retirement plan, your automatic contributions from your paycheck mean you are already going to be buying low in a bear market. That’s great.
You might want to consider increasing your contribution rate to buy even more stocks on sale in a recession.
Another option is to build up a side kitty of cash today (in addition to your emergency money) and when stocks start to slide, add more money to the stock funds and exchange-traded funds you own in an investment retirement account or regular taxable account. Ten, 20, 30 years from now, the fact that you took advantage of stocks on sale will leave you with even more money to enjoy your retirement.