Profiting From the Next Recession

Rare is the decade where a capitalist society doesn’t experience an economic slowdown. Call it a soft landing, recession or depression, the results are the same with varying degrees. Economic slowdowns and declines are inevitable under capitalism.

Expansions are born from the depths of the previous economic decline. Inflation tends to be low and unemployment high. Pent up demand is waiting for an influx of goods and services to satiate desires. As businesses whittle down inventory, the recession eases. A glimmer of increased demand begins the cycle all over. Employment increases to meet demand. Eventually wages climb as the labor market tightens.

Increasing productivity means even a slowdown in growth can start unemployment ratcheting higher; no actual recession needed to send hearts aflutter. Sometimes the economy slows sharply as in the early 1980s and 2008. Most recessions since World War II have been mild, with GDP declining 2% or less. The 2008 recession lasted 18 months and it felt like the world would end. In reality, GDP declined 5.1%. The 2001 recession, in comparison, lasted 8 months with a .3% decline in GDP.

The last time economic activity declined more than 10% was in the waning days of WWII. Reduced military spending caused the GDP to dip 12.7%. Unemployment didn’t climb much in 1945 as the U.S started the switch back to a peacetime economy. Before WWII, recessions more often than not exceeded 10%. Economic downturns were far sharper in those days and lasted longer. Still, unemployment can climb quickly to double digits or nearly so. When pink slips start flying they come fast and furious.

The longest economic expansion on record started March 1991 and continued for a full 10 years, ending March 2001. The current economic expansion started June 2009. We are nearing another record long period of economic nirvana.

Long periods of economic bliss lull people into a false sense of security. Debt grows larger as a percent of income as households are more confident.

Inflation is creeping higher. The Fed is slowing increasing interest rates to reflect a normalization of interest rates after the deep 2008 recession. Unemployment is near record lows and employment numbers are off the scale! Warning signs are beginning to show as consumers are reaching their credit limit, ending the buying binge. The cycle is nearing the point of renewal.

Renewal is painful if you’re unprepared.


Overproduction and debt usually play a role in most recessions. U.S. production isn’t as out of touch with demand as world production, most notably in China and Germany. However, by previous economic standards, the economy isn’t stressed enough to trigger a downturn of any size. Things look really good right now. But. . .

Tariffs are the wildcard. Tariffs are designed to slow the economy, regardless the claims of politicians. Business is well aware of the seriousness of the current rush to impose tariffs. Tariffs also push inflation higher.

Signs are showing in the EU, China and other countries. The U.S. so far is humming like a well oiled machine. If tariffs continue ratcheting higher the U.S. will eventually stumble, too.

Tariffs are taking on a different flavor this time around. (This time isn’t different, however.) In 1929, tariffs were adjusted across the board. Retaliatory tariffs were levied nation against nation around the world. Today we see the U.S. imposing tariffs and the target nation strikes back with narrowly focused tariffs against the U.S. only. Without the U.S. a vacuum has formed. Most nations are building new economic alliances without the U.S.

There is no doubt tariffs will cause pain around the world. The U.S. already discovered how the new world order of tariffs will be played out. Harley-Davidson, an iconic American company, is moving some production to Europe to avoid tariffs. If the intension of the tariffs was to bring jobs back home, it’s having the opposite effect! Time will tell how this new world order plays out.

Doomsday Preparations

The world isn’t going to end! You can drop the end of the world stuff right now. However, there is economic pain coming. The exact cause is not yet known. The possibilities discussed about are strong possibilities. Then again, it could be something totally out of left field, like Lehman Brothers in 2008. You never know.

What we do know is that this cycle is long in the tooth and it’s time to prepare for the inevitable slowdown in economic activity, even if it doesn’t culminate in a full-blown recession. Unemployment will climb someday and probably sooner than most people expect. If tariffs bite as they did in the past, we could be within a year of slower economic growth.

Since my crystal ball isn’t any clearer than yours, all I can do is provide good advice that works in good times and bad. Wealthy people have certain habits you need to acquire ASAP!

For several years now I’ve warned clients to reduce, or even eliminate, debt. The 2008 recession only hurt if you were saddled with debt payments. Without debt, 2008 was a minor inconvenience. Debt is a common recession culprit. Don’t be part of the problem! Your insistence you are responsible with debt crumbles when unemployment makes an appearance in your household, your income properties are vacant or the tenants refuse to pay, or your business or side hustle no longer provides the cash needed. I hear the “responsible with debt” mantra often. I’ve also been around long enough to watch said clients have their home repossessed.

Debt is the most important issue to address. If you are deep in debt, there are steps you can take to reduce liabilities fast. Normal pay down of debt may not be fast enough to give you a margin of safety before the recession strikes. Prices are still high. Selling assets at a high is better than liquidating later at any price, or worse, giving assets back to the bank.

I firmly believe you should NEVER have debt on a vehicle. EVER! If you need a car loan you can’t afford the vehicle. If you bought real estate the last few years, consider reducing debt by selling highly appreciated properties. I know real estate never declines in value (egads!), but selling a property or two to eliminate debt obligations allows you to sleep better in any economic environment.

Here is the last word on debt; I promise. All consumer debt must go! No credit card debt! Period.  Now is the best time in a generation to reduce debt. Your assets are worth more now than in decades. Take advantage of your great fortune.

Rainy Day Fund

I’m now going to share advice I give to all clients near, entering or in retirement.

Retirees need to keep ~ two years of spending in a liquid account (money market (I like Vanguard), Discover Savings, Capital One 360 or T-bills). If the market keeps rallying, take living expenses from your index funds. If the market declines, use the liquid funds to live on. Divert capital gains and dividend distributions to the liquid account instead of reinvesting. This gives you a margin of safety of several years before you’d have to either reduce your lifestyle or sell index funds in a down market to cover living expenses.

For those not in—or near—retirement, the same philosophy applies. Rather than two years of living expenses in liquid funds, you may wish to only keep one. In a perfect world you would have Roth IRAs so there would be no tax consequences of moving some index fund money to the money market account.

Facts and circumstances will determine the correct level for you and the accounts you increase liquidity in. Having liquid funds to cover living expenses is a powerful tool to weather any economic storm. The only issues not covered are outliers. An uninsured medical emergency can throw any plan awry. Disability is another potential problem. It’s impossible to cover all possibilities. Having a cushion, a margin of safety, stacks the deck in your favor.

A Hard Man to Break

I don’t predict the economy or the stock market. Far better than me try and fail miserably. This isn’t about market timing! This is about structuring your finances in an appropriate way.

Debt is the worst cancer. Debt is a crisis, especially this late in the business cycle unless you think this time is different. (It’s not!) Low debt levels are always the better path. Virtually every wealthy person you meet says the same thing: leverage (debt) bites you in the end.

Keep adding to your retirement accounts. This is not the time to break a good habit. If you don’t have a lot of non-qualified (non-retirement) money you may have to keep some IRA or other retirement money liquid. If your finances are not affected, no problem. If you do face financial stress you at least have liquid funds available (even if a tax penalty applies) to cover living expenses for an extended period of time without the bank knocking at the door.

Opportunities are created in recessions. The U.S. has had 49 economic downturns in its history. We get to celebrate the grand ol’ 50th with the next recession. Limited debt and liquid funds for spending needs allows you to keep your money invested for the next inevitable economic expansion. The winners of the last recession were the ones who stood pat or even bought while the market was down.

Things have to get really bad for people without debt to suffer. A liquid nest egg coupled with no debt requires a complete system failure before you feel any real pain. And if the system does fail there is nowhere to hide so it doesn’t pay to prepare for it. It’s lights out.


More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.

Keith Taxguy


  1. Matt on July 2, 2018 at 7:46 am

    The sky is falling, the sky is falling! Kidding, good article that serves as a warning shot, but not sure how many will listen.

    Do you think the student loan debt or the housing market resurgence will be of issue in the next 2-3 years?


    • Keith Taxguy on July 2, 2018 at 8:07 am

      Matt, the people who’ll listen already have. If I manage a single convert my life is complete.

      Household debt is at record levels. What could possibly go wrong? Student loan debt is a terminal cancer waiting to drop both feet at once. So many people are in soooooo deep they have few options in preparing for the inevitable. Housing has been hot for a long time. There are only select buying opportunities in certain markets. A big mortgage will haunt many in the next recession. Remember, if things get tight you can cut virtually every cost to the bone to survive. Debt payments stay stubbornly locked in place. Student loans and housing will become an issue when unemployment rises. However, I think housing will be more resilient this time around. Overbuilding isn’t as acute. . . yet. Student loans? The shoe can drop at any time. I don’t want to be around when it does. People will look to me for answers and I just don’t have an answer. My kids got an education without student loans. Caught all kinds of hell for it, too. Off course, my family doesn’t worry about student loans either.

  2. Mr. Prairie FIRE on July 2, 2018 at 8:34 am

    Great post and very timely. I live in Canada and the issue of debt is much worse. Latest stats show that for every dollar earned a $1.69 is spent. Assets are also overpriced, especially housing. If there is a housing correction, then that will be devastating for our economy (it accounts for 20% of our GDP). I will definitely be applying your suggestions of eliminating consumer debt ($1,700 CC) and restructuring $50,000 LOC (I’m thinking terming it out instead) associated with my rentals (which they pay for). Thanks again!

    • Keith Taxguy on July 2, 2018 at 8:40 am

      YIKES, Prairie FIRE! My friends to the north need to hear this as much as in the States. $1.69 spent for every dollar earned? I’m nauseous.

      I’m glad to are thinking your finances over and making intelligent choices. Each situation is different and it sounds like you are properly preparing. Hopefully you can reduce the LOC balance in the near term. If your rental keeps bringing in adequate income you will be better off than most.

  3. Jennifer on July 2, 2018 at 10:25 am

    This warning is timely as things are good right now, and have been for awhile. You can’t change the course of the titanic in a minute, so by the time you really start hearing the “sky is falling” alarm it will be too late. I was still newer in my first career during the 2008 recession, but my company freaked out when it posted the first ever quarter of non-growth in its 100 year history and made life a living hell for its employees (those who remained after numerous restructurings and wage reductions). Even though I was one of the fortunate ones to remain, it was not worth it to stay. I was able to walk away and prepare for a career change only because I had a decent emergency fund and no consumer debt. The mortgage combined with my husband’s student loans did make things stressful, however. I learned many lessons from that recession around what you can control, and I plan to be in an even better position to survive the next one.

  4. KFire on July 2, 2018 at 1:25 pm

    Thank you for this timely post Keith. I’m a new subscriber to your blog and I’ve been trying to sort out what to do to survive the next recession. I have cc debt and student loan debt. I’m 29 and just finally floating after a divorce. I’m going to take the advice you give here and turn the fire up on my savings.I already have a plan to finish pay the cc off in the next 6 months. Thank you again!

  5. Todd on July 2, 2018 at 1:54 pm

    Hey Keith – One nit to pick. I disagree with your money market recommendation. MMAs are a hold over from different times. In today’s world, one should avoid them – they offer low yields and no FDIC protection. Where do the wealthy keep their e-cash? No question, FDIC accounts and T-Bills.

    Great article as always though. Thanks for your contribution to toward my enlightenment.

  6. Jenny on July 2, 2018 at 3:58 pm

    Great article and great advice! Personally, I have some cash waiting on the sidelines to be thrown into my VSTAX and Roth once shit starts to hit the fan. On a side note, If I may ask your opinion on something (not sure if this has been previously covered)… my co-workers and I work as independent contractors. One of them is currently out due to a medical emergency, which of course brought up the topic of money. What is your opinion on an insurance plan, such as AFLAC, versus having the standard 6-12 months of living expenses in an emergency account. I’d love to hear your thoughts. Thanks!

    • Keith Taxguy on July 2, 2018 at 4:20 pm

      Emergency account. I have liability insurance to protect against the big one only. Aflac is a good company to own, but their policies are frequently little more than savings accounts. I can do that myself without middleman costs.

  7. Gov on July 2, 2018 at 4:34 pm

    Interesting article. At 37, my savings are around 15 times yearly expenses, with the house paid off. What would be your advice to me – the only thing that keeps bothering me is if I’m invested right. At 65% stocks, 35% bonds, I always worry if I’m too conservative and am missing out on the gains (which I did in the last 2 years. The market here is correlated to the U.S. so it’s been a nice set of gains in the last 2 years).

    Half of me wants to dump another 15% into the market at an opportune time, but that time never comes!

    Oh, and am based in India (not sure if that changes anything).

    • Keith Taxguy on July 2, 2018 at 4:37 pm

      Gov, my advice works no matter where you live. Less debt is always better. Debt is just as caustic in India as it is in the U.S. Keeping adequate funds liquid for short-term needs also makes sense regardless of geography.

      • Gov on July 2, 2018 at 4:41 pm

        Sorry if I wasn’t clear. I have no debt. My question was on asset allocation given the current market situation..

        • Derrick on July 3, 2018 at 9:58 pm

          Gov you are on the conservative side. But if you feel a downturn is coming you can take some of that money and take it from the bonds into stock funds.

          I am roughly your age and I am 90/10 stocks to bonds. New money has been going into bonds and going to trim some stocks funds and look to get it to 70/30. While I don’t know when I feel a downturn is coming and I am ok with 30% in bonds waiting for a buying opportunity in stock funds.

  8. Cathleen H on July 16, 2018 at 5:39 pm

    I’ve been trying to pay off my primary residence mortgage as soon as reasonably possible- so have about 6 years left for $250k balance (I live in Hawaii), a total of 10 years for the length of the mortgage- from a traditional 30 year loan. However, I have a 9% loan for a PV….we have the cash to pay it off, and still have more than 6 months of cash savings after- but I’ve been saving for a downpayment for an investment property. One of the financial advisers I’ve spoken with is recommending the same thing you are- get rid of debt. I have no other debt, make 6 figures, spend less than $2k (not including mortgage), manage to max out my 401k and Roth IRA, own both our cars that were bought for cash.
    I have a feeling I should just go ahead and pay off the PV loan- and just put off buying an investment property until the market is more reasonable. Though that may be never (according to some real estate agents). At the moment, though, market rents are not keeping up with even a 25% down payment, including a very conservative 40% expense ratio for rent, along with the mortgage. I’d be something like $200-300 in the hole every month! Unless I could pay cash, then even for a small 1 bedroom, I’d be making only 3% ROI. At that rate, I might as well get a CD and not deal with the hassle. Of course, there’s the arguments about appreciation (again, in Hawaii, so its been ridiculous how high the market is here), and tax considerations such as depreciation. But I don’t want to invest just for these considerations that may or may not continue as-is.
    So, basically, I’m saying, good job on the article- your premises for paying off debt and having sufficient funds to live off of in an emergency vs withdrawing from your investments seem logical and sound.

  9. […] strikes is to tune out all media, even social media. Don’t let anyone dissuade from your goals! Selling a portion of your index funds should be based upon personal needs because you retired or have a medical bill. The economy or level of the Dow Jones Industrial […]

  10. Joshua Morgan on January 10, 2019 at 3:34 pm


    Awesome article with great insights and tips. I talk to people each day who don’t understand how important it is to get out of debt and stay there. People just stroll through life, paying their payments, and then BAM! It strikes. Misfortune derails progress erodes any savings and becomes a crisis rather than an inconvenience for a short while. I just go married and I told my wife that this debt of hers (a.k.a ours) has to go! She’s onboard.

    The difficult part is talking with people who don’t see the light and even though you’re walking the path and holding out a hand to lead they simply won’t follow. Maybe you have to get farther down the path for them to realize that it’s actually the right decision. What’s your experience or advice in advising or teaching clients why it’s important to get out of debt? What types of things do you say to these people when they resist?

Leave a Reply Cancel Reply