Here’s How to Invest by Age Before the Next Recession
No matter how much we fight, we will hit a recession in the near future. With inflation hitting all time highs, investing is now a mandatory requirement of your wealth strategy.
Where to invest is the hard part.
And just in case, you haven’t realized it yet, these high prices are here to stay. The Bureau of Labor Statistics released the 2021 median household income and expenses. The median (aka the middle) household expenses for the last three year settles around $60,000. By all estimations, this number will balloon to $100,000 annually by 2050 due to inflation.
Minding your personal household economy just became way more important.
Table of Contents
Why is Investing a Recession proof soft skill?
While a poor man’s financial vocabulary includes debt freedom and bank savings, the wealthy are centered on Cash Flow Management.
Simply put, the rich spend differently and on top of that, they are spending way more money on income producing assets. This helps create new revenue that they in turn reinvest or spend.
Recession be damn, the current of play is centered on making the most of today to impact the future. From Warren Buffet to Peter lynch, the world’s top investors are buying while others are fleeing.
Watch what they do, copy and implement. The goal of this game is to learn to move counter to the herd and become recession proof.
You really need to do an economic inventory
Wealth is more than the amount in your checking and savings.
If you want to become wealthy, it’s gotta be intentional. And it will require focus, energy and time.
Just so you know, we are fusing knowledge, to get income producing assets. All of this to covert your liabilities into strengths. It’s damn near Chemistry 101.
Start with an understanding of your own cash flow. Most people I encounter have no idea how much they really make or take home annually. Even worst, they don’t know how much they spend. This is a recipe for going broke or becoming enslaved by your own lifestyle choices.
Before a recession hits, do an economic inventory. This entails look for where cash is coming from and which expenses poking at your paper boat. Write them down or use a Free app. “Just do it” like Nike says.
Inflation = Less goods + more dollars
According to the Federal Reserve, there’s nothing to worry about. And then, Inflation rose to 8%.
Back in August 2021, Morgan Stanley warned of early signs of inflation while companies moved to decrease their debts and increase prices on goods. But obviously everyone listened to prudent advice, right?
Nope.
At this rate, the next step is a RECESSION. But what is a recession?
A recession is a period of declining economic performance across an entire economy that lasts for several months. During a recession, the economy struggles, people lose work, companies make fewer sales and overall economic output declines. Basically, things get progressively worst before they get better.
Pay attention.
This is how you need to invest by age before and during a Recession —
Plan and Take Bold Action in your Recession 20s
Current Median Net Worth: $0 or less
Anything more than a $0 net worth around 20 means you’re doing better than most of your contemporaries. Why’s that? Simple, student loans aka the living my best life killer.
With a potential cancellation for either $10k or $20k on the way, this is a huge opportunity for you to make your money go longer. The extra cash flow should be tossed toward a debt repayment strategy while matching your employer’s contribution.
PERIOD!!!
Shifting into Adult mode
First, build good credit by paying off your student loans on time and not borrowing more than you need. Beyond that, determine what is an asset in your life and what is a liability. And stop trying to mix up your wants as a new need.
Here’s a quick recession proof recap. Stocks are assets. Financing a used car is a liability. With inflation going up, it means that variable rates are spiking. Keep more money in your pocket by paying off your debt.
Secondly, invest in retirement accounts like 401ks, IRAs and HSAs. A Roth IRA is especially great since you can invest and grow your money tax free. Consult your Certified Fee Only Financial Planner, if you need to use some of your IRA balance to purchase a home.
It’s possible and penalty-free up to $10,000. Saving/Investing as much and as early as possible should be a necessity.
Third, shy away from riskier trends like crypto, NFTs or even day trading stocks. This is not a time to get fancy. You want your dollars to grow in your 20s while getting tax breaks. It’s terrible to see your assets vanish in a blink of an eye.
Fourth, invest in your financial literacy or mindfulness. Books like “Atomic Habits, the Psychology of Money, or the E-Myth” can help rewired your brain towards money. A great book offers infinite wealthy.
Fifth, Don’t walk away from your 20s without an emergency fund. Most experts call for 3-6 months worth of expenses. My wife and I keep about $2,500 per adult and $5,000 per kid in a household as a hard and fast rule. We keep it lean and fast, especially while nearly 60% of Americans can’t come up with $1,000 for emergencies.
Double Down and Repair in your 30s
Current Median Net Worth: $13,900
Now is the time to put your consumer debt behind you. After tackling your credit cards (or if you still are), ensure you are making consistent payments to your student loans.
Don’t worry, you have time to get your median net worth up to at least +$150,000. Even if you suffer major set backs. There is always a low point in a roller coaster.
Recover and Reset Your Wealth Journey
First, aim to build or rebuild your credit score. I famously threw my credit score down the toilet by not making payments on time, but I learned along the way. Try to pay off your credit card statement at the end of each month. Avoid interest fees since they eat up your cash flow. Read Here’s How to Boost Your FICO® Score Organically for all the tips and tricks.
Second, make contributions to your 401(k) or Roth IRA. And recognize the important tax breaks that come with these accounts as well as employer matching. Even a match of $3,000 per year is worth over $800,000 in 40yrs. Basically, take the match.
Third, remember this is likely the most expensive phase of your life. Use it to expand and grow and avoid bad lifestyle spending i.e. happy hour and brunches. Those things run up a bill that will crush you net worth.
Fourth, lean toward home ownership. It makes no sense to rent at over 30% annually. Owning a home in a pandemic and recession, sounds extreme however local banks are offering rare opportunities like the zero-down payment Bank of America plan. Look into it, because renting is merely paying someone else’s mortgage.
Fifth, invest and build in an emergency plan over just an emergency savings. When it rains, it pours. It helps to be prepared with more contingencies. Cover your assets and your family with term life insurance. Don’t do whole life, it’s just a scam.
I bet they told you that “this is what the rich people do.” They always say that.
Money Management 40s to ride out the Recession
Current Median Net Worth: $140,000
Usually, this is the stage where compound interest takes over. Unfortunately, it’s down economy. Just keep investing. This will pay off big in your 50s. At this point, you should have 3X your annual salary saved and invested.
The market slumped but don’t get discourage. You have time horizon on your side. Don’t take the day trader bait, just invest in an ETF that’s pegged to the market like $VOO Vanguard S&P 500 ETF. Most traders are just fancy gamblers. Best way to beat the casino is to not walk in.
Weather the Storm and Center the Home
First, don’t feel pressured to overdo it on massive spending and even riskier get rich quick schemes. I highly recommend that you center yourself. Ground and plant your feet in your purpose. It’s going to take time for your plants to bear fruit.
Try not to make massive last minute liability purchases such as an unnecessary new EV car or a new bigger home while interest rates are over +7%. You have a perfectly good home at home (at home). Your friends will come around with even higher spending events such as destination luxury weddings, super $20k+ baby showers and even crazier kid birthdays. Best to save your coin where you can and use them as they spend their way to depression.
Yep, calm all the way down. And trust the process.
Second, keep doing what you are suppose to do i.e. retirement savings and debt repayments. Now add extra payments on the mortgage to get out of it before your 50s. You will thank you. All of these changes are for you.
Third, if you can’t afford it two times over, avoid it. A big screen TV for $1k is worth $2.6k spent in 2050. You will need all you dollars.
Stop throwing dollars away. Max out your retirement accounts every single year. It’s a massive opportunity to drop as much as $30k as a single person or $60k for married folks into tax deferred accounts. You would also cut down your taxes drastically.
Read, Fastest Way to Avoid Taxes and Retire Rich.
Holding on to Debt Freedom and Automatic Millionaire 50s
Current Median Net Worth: $168,000
If you can hold off retirement. A downturn is imminent and this likely impacted or will impact your retirement savings for the next 2-3 years. Always remember to get out at a high point, not a low point.
Usually around this age, compound interest would have carried you to the finish line. However, we are living in a unique time that requires that you man the sails for a bit longer.
Steady the Ship and Sail Beyond Recessions
First, save at least 5–8X of your annual income. It’s paramount to have an Health Savings Account and an emergency savings account by this age as well.
All of your retirement accounts are offering an additional catch up contribution. For 401ks and the likes that’s an extra $6,500 (2022) to stash away and let it grow. If you have extra funds, this is how you deploy them.
Second, start building out and drafting your retirement schedule. If you have gone this far, it’s time for you to live out your legacy. Share the plan with your love ones or friends. Have fun with your time and wealth. Be purposeful. Be intentional.
Third, asset protection is the name of the game. Protect yourself and your loved ones by writing out your estate or will. Take better care of yourself emotionally and physically. Beyond that pass on wealth.
Nothing is more stressful than retiring without savings.
Wealth through A Global Recession
Most of these recommendations are merely recommendations. You worked hard for your money, you are free to do what you want with it. What I’m offering here is an opportunity to keep your money effectively blooming through financial storms.
No matter how long the next recession lasts and the next one after that, having a financial plan helps.
Start early. Start today. Change your life.
Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T.E.R decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 4.2022. We operate independently.
About Author
