The youngest millennials were 13 years old at the end of the Great Recession back in 2009. For many of their peers, these initial working years since have been filled with relative economic stability, low interest rates, a rising stock market and steady employment.
While the "economic winds" have been at the backs of millennials for nearly a decade, a change in the weather forecast may be coming.
There are early warning signs that the U.S. may experience a slowdown in economic activity within the next 14 months. A common gauge used to measure U.S. economic activity is gross domestic product.
GDP is the total value of goods produced and service provided during the year. In the first quarter of 2019, U.S. GDP grew at an annualized rate of 3.2%. A slowdown in economic growth is one thing, but by definition, two-quarters of negative economic activity is a recession which is expected to occur in the second half of 2020.
Whether the economy slows or slides into a recession, the savvy millennials who prepare for softer economic conditions will not only be able to weather out the economic storm but may also find themselves splashing away in the puddles.
Here are some steps young investors can take to survive an economic recession.
Slash credit card debt: The average millennial has $36,000 in personal debt. Credit cards are now tied with mortgages as the leading source of debt with discretionary spending being the main culprit to the burgeoning balances. Consumption debt (credit cards, car loans, etc.) is a significant barrier to achieving financial independence.
Paying down or eliminating debt is one sure way to survive an economic storm. One popular strategy of paying down debt is the "debt-snowball" method where payments grow as credit card balances are paid off.
Pay down student loans: Student loans are another major financial burden for millennials. Extra payments and refinancing could be an excellent strategy to get ahead of outstanding balances as dark economic clouds gather. Should you find yourself in the economic storm, applying for income-based repayment or the less palatable option, forbearance, may keep you from defaulting and being hunted by collection agencies.
Contribute to a retirement plan: Consistently contributing to a retirement plan, regardless of economic conditions, is an easy way to grow your personal equity and achieve financial independence. While continuing contributions during stock market declines may sound counterintuitive, staying the course in uncertain economic conditions leverages the benefit of dollar cost averaging and time.
Time allows a millennial to ride the highs and lows of the stock market, while dollar-cost averaging provides a disciplined investment approach where a piece of every paycheck is invested in regular intervals.
Ensure employability: Given it has been nearly a decade since the last recession, and the U.S. unemployment rate is near a 50-year low, millennials may be complacent when it comes to job security. But jobs could be anything but secure when a recession rolls around, as companies need to cut expenses to ride out the slowdown.
Millennials should look to build up and update their resumes. Keeping in touch with friends and colleagues in similar industries is another way to stay connected to potential employment opportunities. There will always be a demand for highly skilled, qualified employees. Keeping your resume sharp and colleagues close may lessen the time in finding a new position should yours be cut.
Craft a spending plan: Diets suck, and so do budgets. The word budget sounds like a "financial diet." Instead of engaging in a process that is ridden with guilt when broken, start a spending plan, which is a simple way to keep track of income and expenses. A spending plan should list all income along with detailed expenditures. Review your expenses to determine what can be reduced or eliminated to help bolster your savings or eliminate your debt.
One suggestion to become reacquainted with your spending is to take the 7-day Cash Challenge. Estimate your discretionary spending for the week, leave your debit and credit cards at home and pay cash for all your purchases based upon your guesstimate.
We have found those who engage in the challenge draw down their cash pile before the weekend even starts. Most millennials have removed themselves from the physicality of spending. Take the challenge and choose paper over plastic to better appreciate your spending habits.
Take advantage of a downturn: For many, recessions are a time of financial distress and anxiety. But for the millennials who have prepared for the worst by paying down debt and bolstering savings, economic weakness can bring about opportunities to save big. An obvious important caveat to this concept is that you remain fully employed during and after the recession.
A recession is potentially a terrific time for a major purchase such as a home. Should you have job security, recessions generally usher in lower interest rates, which reduce the borrowing cost on a home mortgage.
A decline in mortgage rates to 4%, from 5%, is a potential 20% savings in interest expense over the life of the loan. In addition to lower borrowing costs, those homeowners who did not heed the advice given above may find themselves over-leveraged and be forced to sell their home at below market prices, again providing a great buying opportunity for the financially secure.
Softer prices and incentives from companies trying to sell their goods and services during recessions may also provide a buying opportunity for the financially prepared. Other significant purchases and outlays such as a car, home appliances and home remodeling may come at a steep discount. Opportunity favors the financially prepared.
Economic booms and busts are as natural as the changing of the seasons. The oldest millennials will most likely experience five or more recessions during their remaining lifetimes. Instituting these basic principles of surviving a recession will help prepare you to survive and thrive in the most challenging economic conditions.
— By Ed Gjertsen II, vice president at Mack Investment Securities
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.