In last week’s issue of The Equity Shop Newsletter, I dropped a few gems that Millennials can act on now to survive a recession. For this blog post, I want to dive a little deeper into those tips to help Millennials in tech prepare for what appears to be the next economic downturn. So let’s get into it.
1. Understand the economics of the company you work for
Educate yourself on the business model of your employer. How does the company make money? How will an economic downturn impact them? These questions are especially crucial for startup employees and even those anticipating IPOs. A loss of income represents the most significant risk for Millennials, and it illustrates the need to maintain an emergency fund. Think of it as your personal runway. All in all, understanding the risks that your company faces will provide insight into how a change in the economy could affect your job security.
2. Diversify your income
When we think of diversification, we often focus on investment allocations. When, in fact, it can be applied to sources of income as well. Because the loss of income is one of the biggest threats in a recession, having multiple streams of income can mitigate that threat. We live in an age where information spreads at zero-marginal cost, and you can reach anyone with an Internet connection — 24/7. As a Millennial in tech, there’s plenty of ways to monetize your demanding skillset and experience. I highlighted a few of them in a post on LinkedIn a few weeks ago.
3. Pay Down Your Debts
While I understand the idea behind using credit cards for travel and Uber eats points, be mindful not to carry any outstanding balances. If you don’t pay off your balance every month, interest charges will keep eating away at your income. Remember, it’s your spending, not your income that determines financial success. So, pay down as much debt as you can. It will help free up money that you can use in the future.
4. Save as much as you can
The best opportunities come when you are one of the few with cash. If you have cash sitting on the sideline, this is the moment you’ve been waiting for. The stock market is the only market where things go on sale, and people run out of the store. Ironic, isn’t it? Having the wherewithal to invest when the market is down, and prices are low, is advantageous, because you could get a bargain. Generally, during recessions, even the most sustainable companies can be affected and suffer earnings hiccups. Accordingly, you can take this opportunity to buy a few winners for the long term. For DIY investors, it’s advisable to set buy-limit orders to ensure owning stocks on your terms.
5. Increase retirement contributions and equity exposure
If your financial situation allows, now is as good time as any to increase your contributions to your 401(k), or any other employer-sponsored plan. If you’re a young investor, it’s safe to say that you are in this for the long run, and it’s likely you wouldn’t need this money until retirement. In that case, it might benefit you to increase your equity exposure as well. Doing these two things will help ensure you reap the benefits of participating in the next bull market.
6. Set up a systematic investing plan
Investing is simple, but it’s not easy. While I don’t agree that a single best strategy exists, I do believe in the efficiency of the market. For that reason, my personal approach is to continuously buy globally diversified assets while paying low fees through passive investment vehicles. In other words, I believe time in the market outperforms timing the market. This strategy is known as dollar-cost averaging. It’s a perfect recipe for young investors and Millennials in tech seeking to turn income into wealth. It is also a way for investors to mitigate short-term volatility in the broader equity market.
Here’s how you can get started:
- Decide on a fixed dollar amount that you are comfortable investing every month or every pay period.
- Select investments that align with your risk tolerance and time horizon. If you’re new to investing, index funds are a great start.
- Set up automatic contributions from your checking account to your investment account.
Believe it or not, setting up automatic contributions is arguably the most crucial step of the process. Why? Simply because each habit or task that we hand over to the authority of technology frees up time and energy to pour into the next stage of our growth. Kem and I have been using this strategy to save toward our joint goals and have recently increased the amount we’re investing each month to take advantage of low prices.
7. Start an automatic dividend reinvestment plan
For those Millennials in tech already investing, make sure your ETFs, mutual funds, and stocks are set to reinvest dividends automatically. Otherwise, dividend payments will be sitting in a money market fund earning next to nothing. If you want to turn your income into wealth, you must put your money to work.
8. Take advantage of low interest rates
The Federal Reserve, aka the Fed, is the US central banking system that is tasked with influencing monetary policy, supervising and regulating banks, and maintaining financial stability. On Sunday, the Fed lowered interest rates to 0% as a means of dampening the effects of COVID-19. This is the lowest interest rate we’ve seen since 2008-2015 when the financial crisis occurred. With talks of a recession looming, interest rates will likely be at an all-time low. That being the case, it may be a good time to start shopping around for your first home if you’ve spent the necessary time saving and planning.
Similarly, refinancing or consolidating your loans may position you to take advantage of the lower rates offered by lenders. In the end, you’ll spend less in repayment over the term of the loan. Keep in mind that refinancing your student loans largely depends on the type of loan (federal vs. private). For instance, certain protections, like the student loan forgiveness program or payment plans based on income, only exist with federal loans. You should know the specifics of your student loan to assess whether or not it is beneficial to refinance.
9. Don’t let fear drive your decisions
For many Millennials who graduated into the worst job market in modern times, recessions can be frightening to deal with emotionally. And that’s 100% normal. When your emotions get the best of you, you’re susceptible to making costly mistakes. Don’t let panic or fear get the best of you in these times. Instead, prepare for it now by putting together a comprehensive financial plan.