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The 3 Most Important Money Rules for a Recession

How do you survive a recession? The question on everyone's minds. Surviving a recession is possible, I've done it. Here's my 3 most important tips.

Ramit Sethi

[Transcribed and adapted from the YouTube video: ‘My 3 Money Rules for a Recession’]

Key Takeaways

  • Recessions demand that you recognize the reality, make plans, and act on them. 
  • Take care of your family and friends.
  • Do not sell your investments. And, if you can, continue to invest in the market.
  • Keep an open mind to new opportunities.

We encounter thousands of decisions over the course of our lifetime. Should I buy this? Should I take that trip? Should I upgrade my seat? I narrowed down those millions of lifetime choices down to a few simple rules. You can find Ramit’s 10 money rules that I use to guide my thinking about money, my spending, et cetera. 

But what about a recession? What do you do then? I’m going to share three money rules that I have used to guide my decisions to survive a recession.

I previously shared a framework for what you have to do at a time like this: that we need to acknowledge reality, make a plan, and act on it. Many people do the oppositesthey freeze in place and they wait for someone to tell them it’s going to be okay. Now, keep in mind that my financial situation is different than yours, and it’s different than even my own 10 years ago in the 2009 recession. Nevertheless, here are my rules.

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Rule #1: Take Care of Your Family and Friends

The first rule is not a hard-and-fast rule, like stopping 401k contributions—it’s more of an emotional one. Rule number one: take care of your family and friends as much as you possibly can. 

For me, that meant that the first thing I did was to determine that it was necessary to take me and my family somewhere safe., I started looking in early March, and I used money to make quick decisions that I normally would not have made. We rented a car, found a place, and went—we didn’t prioritize cost over the safety of family and friends. 

Next, check in on your immediate family and friends. Call up those who are closest to you, make sure everybody’s okay, and find out how you can be of help. If that means groceries, figure out a way to get groceries to them. And don’t concern yourselves with the cost. During times of distress like the pandemic and its resulting recession, those costs aren’t as important as taking care of those around you.

In my position, taking care of people also meant letting the folks at I Will Teach You To Be Rich know that we will do everything we can to support them, starting with a $1000 coronavirus stipend. 

That all falls under that first rule: take care of your friends and family.

Rule #2: Do Not Sell Your Investments During a Recession

The second rule is simple: don’t sell investments and stay the course. 

Many of you who have read chapters three and seven of my book know that I talk about low-cost, long-term investing. And you know that I talk about how the market fluctuates, but over time it tends to go up at an average return of approximately 7-8% per year. Notice I said average. Some years it could go up 25%. Some years it could drop by 14%. However, on average, that is what the historical return tells us.

Because I’ve read enough, been involved in the personal finance world for a long time, and I’ve been through recessions with smaller amounts of money in my account—this was just a small test to be able to follow my own plan. And my plan says to keep investing as I’ve always done. In fact, if I have extra money, go ahead and add that to the market.

I received a note, recently, that said: “Ramit, I read your whole book. It was great. Unfortunately, last week I got scared and I sold all my investments. What should I do?” 

That person’s reaction is a perfect example of a person who has the information about long-term returns and everything else, but it didn’t matter. Emotionally they did not connect with the plan—they didn’t believe it. So, they made a huge money mistake.

If you can simply not make a huge money mistake right now, that is a huge benefit to you in the long run. A massive part of making smart choices is to not sell your investments. On the other hand, if you can keep investing during a recession, you will probably do very, very well.

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Rule #3 Always Look For New Opportunities

Rule number three is to look for new opportunities 

If you are playing defense, and you’re building up an emergency fund: do that first. Let’s say you’ve already been doing the plan and executing it—it’s time to start looking for opportunities. 

Honestly, I don’t know what those opportunities will turn out to be. 

There’s a certain point when it’s time to play offense. Once you’ve checked the boxes playing defense, start to look for opportunities to supplement your cash flow. If you have the resources, these opportunities can present themselves in several ways:

  • Learn a new skill. There are plenty of free websites that offer free online courses that teach everything from coding to cooking. 
  • Look to places where you can be of service. These opportunities may not have a direct effect on your checking account, but finding ways to contribute to your community can help you stay involved and could lead to fascinating network opportunities. 
  • Develop deeper relationships with your family and friends. We all need those mental breaks from the stress of the world—why not talk it out with people you love? 
  • Take inventory of your spending and saving. Like I mentioned in my previous article about how to save for an emergency fund, now is the perfect opportunity to look at where your money goes and where it’s coming in from. 
  • Refresh your resumes, cover letters, LinkedIn profiles, or anything else you would need to enter the job market if that’s what it came to. 

You never know where your next opportunity might come from. Keep an open mind, make sure your foundations are solid, and go on the offensive. 

Don’t Panic, Stay the Course, and Move Forward

I understand that a lot of people are still at the phase where they’re building up their emergency fund and developing a solid framework. That is completely valid. 

I wanted to share the way I think about a situation like this, specifically as it relates to money. My hope for you is that these rules will allow you to start thinking about what you can do to move forward, to use your money, to help people, to not play defense and shrink, but to think bigger. It will benefit you, your family, your investments, and your opportunities.

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3 Comments

 
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    Lonnie

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  2. avatar
    Josh @ xzforesight.com

    Making a plan and moving is so important. Analysis paralysis is always there waiting to sneak up and take over your mind.

    If anything this current crisis highlights the importance of being able to manage stress and chaos when the world is in flux. No one really knows how things will play out over the next 50 years, but we can be sure people who are able to manage stress effectively will be 10 steps ahead of people who go bat sh** crazy when chaos comes down the tube.

  3. avatar
    David Jacobs

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