I just returned from a week in the Gulfport/Biloxi area of Mississippi. If you have never been to the area, it’s a smorgasbord of seafood restaurants, hotels, casinos, and tourism. This wasn’t my first visit to the area. I have visited on numerous business trips over the past few years.
What struck me on this particular trip was the realization that the 14 year anniversary of Hurricane Katrina, which devastated the region, is fast approaching. The area has definitely rebounded with lots of new and sturdier construction, but the reminders of what happened remain present.
While there are many new hotels and restaurants that either rebuilt their former locations or are new to the area entirely, many vacant lots are present on the beachfront property of the Gulf. I spent a night in New Orleans at the end of the trip and it too showed the same signs I saw in Mississippi. These areas fought back, but they still have scars left by that horrific storm.
It got me thinking about preparing for crisis, as well capitalizing on opportunities when they present themselves. Bad things happen. There is nothing a city or a person can do about that. The only thing we can do is decide how we react. In the famous words of President John F. Kennedy, “In the Chinese language, the word ‘crisis’ is composed of two characters, one representing danger and the other, opportunity.”
I see a lot of parallels between Hurricane Katrina and the economic storm that hit the United States in 2008. People knew that both storms were a possibility. It was not the first time our country had been battered by such strong winds. When the storm approached, there was underestimation of how bad things would get. After impact, there was an overestimation about the lasting effects and dim prospects for recovery.
It took months and years for recovery to happen, but it happened nonetheless. This principle is reminiscent of the economic markets in the days following the September 11th, 2001 terrorist attacks. Markets plummeted and some people believed that tourism would never recover.
On a personal level, how do you prepare yourself for economic crisis? What do you do in the aftermath? Today’s blog will focus on the answers to these questions.
Education
Not education in the traditional sense. Having an advanced degree might make you more competitive in the job market, but as we saw in 2008, that doesn’t mean much when no one is hiring. Many people who graduated during that time period went right back to school and right back to accumulating more student loans.
In 2018, U.S. student loan debt totaled roughly $1.48 trillion dollars and has a delinquency rate of approximately 11.2%. Some people consider this a massive bubble and ticking time bomb that could spur on the next economic crisis. (Source: StudentLoanHero.com)
The education I am advocating is two-fold: understanding the threat and positioning yourself to mitigate them. This is a concept that I learned in the military. In training, we spend a lot of time learning about various threats to our operations. The threat knowledge might be technical capabilities of a weapon system or the tactics of an enemy. Studying threats also includes reflection on our own vulnerabilities and weaknesses.
To prepare for an economic crisis, you need to understand what threatens your economic safety and where your vulnerabilities are. Threats to your safety might be a job loss, health problem, terrorism, equity bear market, or debt crisis. Your vulnerabilities could include relying on one source of income, too much debt, and not enough cash.
Understanding threats and vulnerabilities starts with keeping track of your finances. If you are reading this, you probably already know that. In reality, budgets are kind of like diets, they are hard to follow for an extended period of time. One “hack” for keeping track of your finances is to use a free service like Mint.com that will interface with your various financial accounts, so that any given time you can see a snapshot of where you stand. There are some automated budgeting tools and alerts within that service which can assist you.
Preparation
Once you know potential threats, your vulnerabilities, and where you stand financially, it is time to prepare for potential economic crisis. Most financial commentators will tell you that the way to do this is to make sure that you have an emergency fund and eliminate debt. While this isn’t bad advice, it also reeks of a scarcity mindset. Personally, I want economic freedom and it is my belief that it will be achieved by expanding our means; not penny pinching.
If you have one source of income, then you should be scared. If you have one client, you should be scared. This is perhaps the single biggest vulnerability most people have. While your day job might be your main source of income, everyone should be working towards creating other streams of income. These can come in the form of a second job, freelance work, selling products, royalties, dividends, rental income, or other investment income. Cashflow is vital and having only one source is a dangerous choke point.
Developing a plan is part two of your preparation. Going back to an emergency fund, you need to know exactly how many months you can survive based on cash reserves and secondary sources of income. You don’t want to be forced into a position where you have to sell assets at a bad time or for a loss. Your contingency planning should include what expenses you could cut in a time of emergency. We all have discretionary spending that we enjoy, but could go without if we had to. Know those numbers and your plan before something bad happens.
On the topic of something bad happening, hedging is also important. Making sure you have the proper auto, property, health, and business liability insurance is critical to avoiding a personal economic crisis in the first place. A Harvard University study indicated that medical expenses represented 62% of all personal bankruptcies. While none of us want to think about getting into a car accident or getting a chronic illness, we need to prepare for such possibilities. Likewise, carrying insurance protecting you from accidents you might be liable for is vital to your economic survival.
Stay Calm and Capitalize on Opportunities
There are a few quotes I’m reminded of as we move on to the last part of this article.
“The devil whispered in my ear, ‘you’re not strong enough to withstand the storm.’ Today I whispered in the devils ear, ‘I am the storm.’” – Unknown
“The time to buy is when there’s blood in the streets.” – Baron Rothschild
“Personally, I don’t save money; I only store it for a short period of time until I can invest it. Saving cash is like saving a legal pad – it’s worthless because money, like any paper, is only good when it’s used. If you leave money in savings too long, it disappears.” – Grant Cardone
After the economic storm has hit, fear will be off the charts. The volatility index will scream to new highs. Commentators on television will talk about how this is a “new normal” and how bad things are. Spending will either slow dramatically or halt entirely. This is the time you have been preparing for.
Hopefully you have a buying list ready when this moment comes. Maybe you have always wanted to get an investment property. If you like equities, then maybe you have a laundry list of newly cheap dividend payers. If you are like my buddy Peter who blogs with me here at JPCashflow, then you love market crashes because of the bear market options trading strategies he has at his disposal.
The only way to capitalize on these opportunities is to make sure that you have your personal financial house in order, your preparations in place, and the emotional fortitude to block out the fear that will engulf everyone else.
Summary
In closing, your action steps are to:
- Get your finances right – know where your money is, what the threats are, and understand your vulnerabilities. Join our free mailing list to continuously educate yourself on financial topics.
- Prepare for the fight – cultivate multiple sources of cashflow and stockpile the cash you need to thrive.
- Be brave – ignore the hyperbole of television personalities and go on the offense.
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