I listened to an interesting podcast yesterday on how to recession-proof your finances. Fluctuations with the yield curve–it inverted over the summer, then un-inverted itself late fall–have business leaders pondering the imminence of a recession. (A special thank you to my M.B.A. Economics class for helping me understand that sentence. Especially given I could not have written it six months ago.) Chief among the suggestions in the podcast was making yourself invaluable in your workplace, followed closely by stockpiling cash.
These suggestions make sense. After all, if you don’t lose your job to economy fueled downsizing, you’ll be able to maintain a fairly similar quality of life as before. If you do happen to be laid off, a sizable emergency fund can help you float until consistent paydays return.
What struck me about the podcast, though, was one question the podcaster posed: “What would you do if you lost 50% of your income?”
This was our reality in 2017, when M was laid off, but he quickly applied for (and received) unemployment. We were able to make up the difference by cutting back our budget until he was rehired a few months later.
This was also our reality, to an extent, in the early years of our marriage, when we made just 50% of our current take home salary. (A combined salary which, at the time, was right around the national average wage index.)
The question made me think: Could we survive a 50% pay cut? What about a 30% or 20% reduction? We have no debt outside of our mortgage, but some months pay more for childcare than said mortgage. We’ve also increased our lifestyle since then, though it’s hard to say if the budget increase is a natural one due to adding two kids to the mix, and you know, adulting.
That said, I thought it would be fun, or at least interesting, to see what we could cut out or restructure in order to use less of our income for necessary expenses. We’re currently refilling our emergency fund and are about $10,000 away from our goal. (I know we could pull back on our investing to save up faster, since we save between 20-25% annually towards retirement; however, I’m happy to save at a slower pace since our jobs are fairly safe for the time being.) If we really went bare bones, I think we could save $10,000 in 3 to 4 months. Realistically, we’ll probably do it in 5 to 6 months, but it’s interesting to think about short-term pain for faster gain.
Here are some areas we could cut back:
- Discretionary spending: M and I each have personal spending cash, and we typically spend $200 / month on eating out and entertainment. I’m sure some truly frugal people are gasping at that number, but date nights are a priority for M and I, and we enjoy going out as a family on occasion too.
- Our cell phones: We’re currently on a family plan with M’s brother and pay $100 / month. I’m going to explore a plan through Ting mobile to see if we can reduce that line item.
To be honest, everything else feels fairly fixed. We technically could have a lower mortgage payment were we to refinance to a 30-year mortgage (something the podcast recommends for those in a position to be affected by the recession). However, we like making higher payments on our 15-year mortgage, knowing our home will be paid off faster (and even with a 15-year mortgage, our total housing costs are less than 30% of our take home pay).
We consistently spend about $125 / week on groceries, which feels reasonable for a family of four who eats in the majority of the time (save for those special date nights or meals out after church).
We pay a lot in gas right now with M commuting 45 minutes one way to work, but it’s a negligible amount compared to the raise he received when he moved stores.
I think the takeaway for me, is not so much about cutting our budget by 50%, but instead about having an awareness of how lifestyle creep has allowed us to become comfortable at a higher salary. There’s no shame in spending more when you earn more. But if mindless spending is keeping you from reaching your financial goals, I encourage you to take a closer look at where your money is going to make sure your spending is in line with your priorities.
Thinking about saving also made me appreciate the efficacy of automatic savings. I find that if the money never comes into my bank account (i.e. automatic retirement contributions), I’m much less likely to miss it. After all, it’s far more difficult to see a large amount of money you could spend and instead choose to save it.
This is a long, rambling post to say we’ll be ramping up our savings in the coming months, recession or no recession. And that if you want a deeper dive into how to prepare for a seemingly imminent economic downturn, I recommend listening to this podcast.