How to Become Recession-Proof

When I was 19, I got fired from my job.

It was sudden, and a bit of a shock at the time.  But as I drove home from work that day, I actually started smiling.  The whole thing just seemed kind of funny for some reason.

Then I thought why?  Why am I not scared?  In fact, I felt completely fine.

And it took me a while to figure out why.

I was living in a share-house, so my expenses were low. And I had savings in the bank. These two simple things meant I didn’t have to freak out about paying rent or buying food.

In fact, I realised I could live off my savings for quite a while.  If you’ve read my first book, this is what I ended up referring to as the summer of freedom – where I got to see what it’s like living off your savings and not having to work.

That 3 month experience motivated me for the next 10 years to make that a permanent reality.

Now, the job loss itself was caused by my bad attitude at work rather than a recession.  But the situation is basically the same.  Your income disappears and the future is uncertain.

What I’ve come to realise is that a recession itself isn’t really what hurts you. It’s the position you were already in when it happened.  In this way, a recession magnifies what’s going on beneath the surface.  Or, as Warren Buffett would describe it, “Only when the tide goes out do you see who is swimming naked.”

If you’ve been living paycheck to paycheck, with consumer debt and a maxed-out lifestyle, then yeah, a job loss or a recession is going to be brutal.

But if you’ve got savings, flexibility, and reasonable expenses – the outcome is dramatically better.   And it’s this lesson I want to unpack in more detail.

What people get wrong about recessions

Before we get into the practical stuff, I want to push back on the way most people think about recessions.

People often imagine them as apocalypse-like events. The economy implodes, everyone loses their job, and our standard of living crumbles.

But the reality isn’t quite that dramatic.

In most recessions, around 90% of the workforce stays employed.  Yes, things get harder.  Yes, people get scared.  And some industries get hammered.  But the vast majority of people keep showing up to work and getting paid, the same as before.

The media doesn’t really cover this because “most people will be OK” isn’t a very clickable headline.  So we end up with this distorted picture where every potential recession is half expected to be rioting and breadlines.

Two experiences in the same recession

The exact same recession can play out very differently depending on which of the following groups you’re in.  One group is what we can call the panicked majority, the other is the prepared minority.

The panicked majority.

These people live through it as kind of like an economic disaster reality show. They watch the news obsessively, which of course, says how much worse things will get.  They watch their portfolio sinking further and further, until eventually they can’t bear it anymore and sell.  Their long term plans are abandoned in favour of ‘safety’.  They lock in losses, pause all monthly investments and maybe even move a large portion of their wealth to cash – including their super.  They emerge from the recession emotionally scarred, with less assets, and are convinced it’s a ‘false recovery’.

The prepared minority.

These people lives through the same period in a completely different way.  They’ve got a sizeable cash buffer, manageable debt, and moderate expenses.  When everything was booming they socked away money, resisted taking on more debt and resisted lifestyle inflation. They kept showing up to work or running their business as best they could. They avoided the gloomy news, stayed focused on their goals and kept investing. They saw an opportunity to buy cheap assets that the panicked majority were offloading. These people emerge from the recession unscathed, with more assets, and more confidence in their plans.

So the same recession can create two completely different outcomes – based solely on individual actions and mindset.

Let me make this a bit more concrete with a personal example.

Investing during a crash

During the COVID crash, the scariest days were when the market was down more than 30% from the highs. Some days it dropped 5% in a single session – one day it even fell 10%!

As you can imagine, the news was intense.  I wish I had a dollar for every time I saw the word bloodbath, or collapse!  Every headline was saying how it might be worse than the GFC, or even the Great Depression.

And to be fair, when you put the entire economy on hold for an indefinite period, things start looking pretty uncertain.  But I kept buying shares anyway.  Even on those worst days.  And those purchases are now my lowest buy prices of the entire portfolio.

My thinking was: this won’t last forever.  Eventually things will go back to normal.  And over the next few decades, I want to own a lot more assets than I do now.  And since prices will probably be a lot higher than they are now, it only makes sense that I buy as much as I can while prices are lower.

So the shares I bought when everyone was freaking out are now the most profitable buys I’ve ever made.  Because I had the right mindset and took the right actions.  And I’d built a situation that allowed me to take advantage of it.  Not only did I not have to sell, but I had the option to keep buying.

That’s why having a strong financial position is so powerful.  It gives you safety, sure.  But it also gives you the space and peace of mind to keep acting rationally when others are feeling scared and vulnerable.

Recessions = wealth transfers

My favourite thing to do is zoom out and look at things from a different perspective.  And when you zoom out on recessions, you see that each  recession ends up being a massive transfer of wealth from one group of people to another.

I don’t mean this in a conspiratorial way – just simple logistics.

Assets move during recessions.  From people who can’t or don’t want to hold them, into the hands of people who can and do.

People are selling because they need the money, or they’re panicking, or they over-leveraged themselves.  So when you hear about a recession, don’t just think “the economy is in the toilet.”  Think: asset ownership is changing hands at a very important time in a specific direction.

What direction is that?  Basically, from the unprepared to the prepared.

Which group are you going to be in?  That’s what all this is really about.

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Your levers of financial strength

OK, let’s get to the practical stuff.

None of these things require massive effort on your part, and many will be familiar to you.  But I need to mention them for those that are new to my content.

Each can be useful, and they stack on top of each other to put you in that magical group – the prepared minority.

1- Maintain a good savings rate. If there’s only one thing you do in your whole financial life, make it this one. Living through a recession is far less scary if you’ve had a savings habit beforehand. A recession can take your income away, but your savings rate will ensure you’re in a better spot if and when that happens.

2- Minimise debt. Pay off any consumer debt as fast as possible. When hard times hit, the last thing you want is money flowing out the door for car repayments, credit cards, and other rubbish like that. Paying down your mortgage (or having savings in an offset) also gives you the ability to take a breather if you lose your job.

3- Keep an emergency fund. A few months of expenses in cash, an offset, or somewhere easily accessible. The point is just to have something you can tap into without selling investments at the worst possible time.

4- Refinance your mortgage. Get the best rate you can while you’re in a good employment position.  You can even extend the loan term or reduce your loan limit for more cashflow flexibility.  You can keep paying the same amount if you want, but your minimum is now lower, giving you space if things get tight.

There’s that old line about banks – they’ll give you an umbrella when it’s sunny and take it away when it rains.  So you want to get everything set up as optimally as possible now while your situation is solid!

5- Have flexibility in your spending. What parts of your lifestyle could be considered optional? We’ve all got areas where we could trim the fat if we had to. Think about all the ways you could do that.  Not only do lower expenses make it easier to plug a gap in income, it’ll make a recession a lot less stressful.  You’re basically turning down the speed on the treadmill.

6- Be open to generating extra cash. People say there’s no work in a recession. That’s a bit dramatic though.  Yes it gets a lot harder.  But in most recessions, 90% of the workforce stays employed – meaning most people still have money to spend on stuff.  To prepare, you can look at side gigs, selling unused stuff, renting out a room, learning new skills now you can monetise later.  The options exist if you want them.

7- Income-producing investments. An asset that grows in value but has negative cashflow becomes a burden when you no longer have a job – trust me on that one!  Even if the asset grows in value, the fact that it drains your bank account makes it less enjoyable to own.  Income-producing investments during a recession are like heaven on earth. The values fall, sure, but you still get regular chunks of cash to help you pay the bills.

That’s my basic checklist. None of it is a magic solution.  But when you stack a few of them together, you’re already most of the way to becoming recession-proof.

The mental game

The truth is, your mindset is actually the most important factor in surviving (and thriving) in a recession. Way more important than any of the specific strategies.

Because in many cases, the worst damage in recessions comes from people making bad decisions – not necessarily market falls.  So how do we avoid those?

— Know the difference between concern and fear

Concern itself is useful. It makes you keep on top of your finances, adjust your plans, and prepare for different scenarios. And all that is productive.

Fear, on the other hand, is paralysing. It makes you sell during a crash, pause when you should act, and lose perspective on your long term plans. And that’s destructive.

This matters a lot.  If you find yourself in fear mode, the solution is to step back, look at your situation, and focus on the productive stuff instead.  Along with the following…

— Trust your preparation

If you’ve built the strong financial foundation we’ve discussed, you’ve already done the hard part.  In fact, you’re way ahead of most people.

The hard part during a recession is trusting that foundation.  It’s like a giant storm thrashing a newly built house – it’s the ultimate test of sturdiness.  But if you go running out of the house due to fear, you can’t let the strength of the house protect you.

The ability to stay the course is what separates people who end up  wealthier from recessions from those who get burned.  Even if you don’t or can’t buy any assets, if you can avoid panic-selling you’ll still come out the other side more confident in yourself and your strategy.

OK let’s flip this around for a minute.  Sometimes the best way to see the power in something is to look at the opposite.

How to be financially vulnerable

What actually puts you in a financially weak and vulnerable position?

— A single income stream
— No savings
— Lots of personal debt relative to your income
— High and inflexible lifestyle costs
— Very little in liquid, accessible investments
— Assets that are heavily negatively geared
— Having a personal reluctance to adapt or change

A good chunk of Aussie households tick most of these boxes. Which is probably why they genuinely worry when the economy wobbles.  But this financial vulnerability has been created – it didn’t just happen.

By doing some of the things in this article, you’re heading in the other direction. Towards strength, options, and breathing space.

You can never guarantee that a recession won’t affect you. But there are countless ways to prepare and deal with it, which takes most of the worry out of the situation.

A few final thoughts

There’s the theme that runs through all of this – and all my content, in fact.

External factors will always be a factor. Recessions happen. Job markets change. Markets will crash. We can’t control any of these things.

But our own flexibility, how prepared we are (mentally and practically), and our willingness to be proactive – all these are within our control.

Think about your life.  Every difficult situation you’ve ever faced, you figured it out.  A recession is the same.  It may not be nice, but you’ll adapt – just like you always have.  Once you truly internalise this at a gut level, the fear of recessions basically dissolves.

So if you haven’t already, build a savings habit.  Keep your debts manageable.  Maintain some flexibility, and invest in things that produce income.  Most importantly, develop a mind that focuses on being proactive before and during whatever kind of problems show up.

Do that, and the next recession won’t be a disaster.  In fact, it could end up being one of the most profitable periods of your financial life.

Resources you might find helpful:

 Financial Advice
If you want help to implement your FI strategy, optimise super, or plan your retirement, I can connect you with someone I trust. Find out more.

 Mortgage Broker
My personal broker for the last 10+ years. They’ve helped me with buying, refinancing, and debt recycling. Check them out.

 Strong Money Australia Book
Your complete guide financial independence in Australia. Amazon, Audible and Spotify.

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