Recessions are scary, but what happens during a recession, and how can you prepare your business and yourself?
Here are actions you can take to survive a recession and, more importantly, identify opportunities to maximize your wealth.
What is a Recession?
A recession is when the economy shrinks across multiple business sectors, resulting in a prolonged downturn in economic activity.
How Can a Recession Impact You?
When there’s a recession, unemployment and the cost of goods rise, spending slows down, and assets and income decline. For many, it becomes increasingly hard to afford the standard cost of living, let alone any additional purchases or spending.
The good news is that recessions are typically shorter in comparison to depressions. Recessions may range from months to 3-4 years, whereas depressions can last much longer. The last Great Depression was a decade long.
Since a recession is essentially a slowdown of the economy, people and businesses will cut back on spending and investments and focus on preservation.
However, for some, a recession can offer an opportunity. The great investor Warren Buffet said, “Be fearful when others are greedy, and be greedy when others are fearful.”
If done properly, there are opportunities to catch the wave of recovery on the way out of a recession.
How to Protect Yourself and Your Business in a Recession
Follow the acronym RAID.
Revisit Your Goals and Priorities
It is more important than ever to get clear on your goals and priorities during a recession. Your priority and goals are there for you to refer back to when making decisions. They will help you determine your best course of action.
You’ll want to start by identifying your top three goals. Even if you have 20 goals, realign yourself with the three top-priority, non-negotiable goals.
Having too many goals can get overwhelming, especially during times of uncertainty, causing you to deviate from what’s most important. It’s not to say you cannot have the other goals, but you’ll want to identify the highest priority ones first, and when you accomplish them, you can revisit what’s left.
As long as you’re clear on those top three goals, you’ll find it much easier to make decisions.
Adjust Your Cash Flow Plan
If a goal is a destination on your GPS, then a cash flow plan is the road map to get there by allocating your money to the right places.
A cash flow plan empowers you to be intentional about your spending. Instead of looking at your goals as something nice to have, it prioritizes them and makes them achievable.
Unlike a budget, a cash flow plan allows for ‘guilt-free spending.’ It’s about putting money towards the important things first and spending what’s left over. You can live the lifestyle you want without compromising your goals because you don’t need to count every dollar you spend.
Two key reminders when spending during a recession:
- Avoid overspending by getting clear on your cash flow plan. This will leave more cash in your corporation, benefiting your business and taxation.
- Avoid making large purchases, such as a new car or home, if possible. With higher interest rates and costs of goods, you’ll be hit twice if you borrow money to make big purchases. You don’t want to tie up monthly cash flow by servicing a large debt. It may add years to your debt load, ultimately diverging you from your goals.
Invest with Your Insurance Policy
When inflation rises, the cash sitting in your corporation starts to lose its value.
Putting the cash inside a life insurance policy owned by your corporation is an excellent strategy because it keeps your money safe and grows it in line with the inflation rate, all while tax-deferred.
You can maximize every dollar and make your money work for you.
We recommend owning a Whole Life Participating Policy. It’s a cash value policy that allows money to grow tax-free with diversification and low volatility. As long as you keep the money inside the policy, it will grow tax-free. When you pass away, the proceeds will also be paid to your family tax-free via the Capital Dividend Account.
If you’re wondering whether you can access the cash while you’re still alive? The answer is yes.
There are a variety of ways to access the cash inside the policy. You’ll want to find one that’s the most tax efficient for you. For example, cashing out the policy through a collateral loan from a bank is a method that offers tax advantages.
(Here are two other ways you can access the cash from your life insurance policy)
Diversify Your Investments
Diversifying your investments is essential to creating a winning portfolio.
Being biased towards a certain investment vehicle may cause an imbalance in your overall portfolio. A well-known Canadian investor, Kevin O’Leary doesn’t hold over 20% of his net worth in one asset class.
People who lock up 60-70% of their wealth in real estate face a lot of risks. Losing a tenant while paying higher interest on the loans can be scary.
In a recession, interest rates increase, and people lose their jobs. You risk losing your tenants and the price of rent dropping.
This is why reviewing the overall structure of all your investments is important to see if you are over-concentrated in any particular area.
When considering your portfolio structure, a general rule is to avoid interest-producing investments, such as bonds or GICs. Focus on building a portfolio of capital gains-producing investments because you pay less tax on the gains than on interest earned.
(What are other ways business owners can pay less tax in Canada? Here are five different ways)
In summary, review & diversify your investments, lower your debt levels, and take the income from your assets to purchase more assets as they drop in value.
Watch a video on the topic
Being Prepared for a Recession
In summary, these four steps, RAID, are great guiding principles for your overall financial wellness during a recession.
- Revisit your goals and find your guiding star.
- Adjust your cash flow plan to achieve your goals and avoid unnecessary spending.
- Invest in your insurance as a safe place to grow your cash.
- Diversify your investments so you are not susceptible to any one market.
Even in chaos, there are opportunities to create wealth that will last you a lifetime; follow these four steps and easily pass this storm.
Organizing your financial future is now more important than ever. Book a call to create a customized financial plan built around your biggest goals so your money works for you in the right places.
