How to Prepare for the Next Recession

A few people have asked me about what my plan is if a recession happens, and also, how much they should save if they plan to start their own company. Both routes require saving a significant amount of money.

As a disclaimer, with everything we talk about, your mileage may vary.

1. Calculate Your Burn Rate

Burn rate is how much you spend per month on essentials that you need to survive. Examples of essential expenses are:

  • Rent/mortgage payments

  • Food

  • Internet

  • Commuting to/from work

  • Cell phone service

If you’re someone with a family, your burn rate will likely be higher.

Let’s dive into an example of a person living in San Francisco. According to Rent Jungle, the average rent in SF for a one bedroom apartment is $3,300. If you they have a roommate, then each person would pay $1,650.

image via https://www.rentjungle.com/average-rent-in-san-francisco-rent-trends/

image via https://www.rentjungle.com/average-rent-in-san-francisco-rent-trends/

To survive, my essential expenses are:

  • $1,650 Rent

  • $250/month Food ($8.33 a day)

    • Precooked meals

    • Good if focused on job searching

  • Work/Find Work:

    • $ 50/month Phone

    • $ 50/month Internet

  • Total: $2,000/month = $1,900 survival + $100 work

My goal would be to have a minimum of $12,000 in savings in case a turn of events happen.

2. Months to Hire

The next step is to figure out how long it would take to find a new job. If you were fired tomorrow, you don’t want to be out on the street because you can’t pay rent.

Things to consider:

  • If “xyz” happens, which industries are impacted?

  • What are some secondary effects?

  • How can you be impacted?

To be on the safe side, I recommend trying to save a minimum of 6 months of basic living costs. Typically, the higher you are on the corporate ladder, the longer it will be to find a comparable job.

Starting a Business

If you’re looking to start a business, I recommend saving a least 6-12 months of runway. During the first few months of starting up, the cycle usually looks like this:

  1. Build an MVP

  2. Talk to customers

  3. Iterate

  4. Repeat steps 2 & 3

Ideally, your business has monetization built-in the product from Day 1.

One of the big disadvantages of keeping your savings liquid is that you could lose out on gains if you invest in the market. People have been predicting a recession to happen since 2014, and it’s hard to pinpoint precisely when it will occur.

How to Make the Money Work for You

I recommend storing your liquid assets in a high-yield checking or savings account to accumulate interest. Aim for 2% or higher if possible.

Some banks offer a bonus ranging from $200-800 for opening a new account.

Pros:

  • No risk (FDIC insured + clear bonus requirements)

  • Minimizes opportunity cost

  • ROI is usually in 3% to 20% range

Cons:

  • Requires legwork for minimum number of monthly transactions ($0.50 Amazon reloads, direct deposit)

  • Taxed as income

  • Might be a bad use of your time (YMMV)

Bottom line

At the end of the day, do what makes sense for your lifestyle. Even if the recession doesn’t happen, it’s still a good idea to have 6-12 months of savings in case a turn of events happen.



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