78: How to Prepare for a Recession

0:00In America, half of every dollar spent on brand medicines goes to entities who don't make them. While middlemen like PBMs and 340B hospitals drive up costs, Biopharma is investing$500 billion in new infrastructure and manufacturing here at home and helping patients buy medicines directly at lower prices. Tell Washington to end middlemen markups and put American patients first. Visit phrma.org slash middlemen. Close your eyes, exhale, feel your body relax, and let go of whatever you're carrying today. Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class. I got them delivered free from 1-800-CONTACTS.

0:44Oh my gosh, they're so fast. And breathe. Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-CONTACTS.com today to save on your first order. 1-800-CONTACTS. So Robert, before we jump into today's episode, I think it's really important for us to share our special announcement. Yes, this is the week. After months and months of work and preparation, we are finally live with the Rich Habits Network. Everyone works so hard on it, and I am so incredibly proud. We have put together six incredible modules to start that I think are really, really great.

1:23We dug deep, put in all the best stuff, all the secret sauce that we have, as well as all the tools we've built, and most importantly, is the networking opportunities for everyone in the school community. So I'm super excited about it, very proud, and really just ready to dig in. And Robert, just so we're on the same page, to your point, these modules include assessing your finances, plotting your course to win with money, defining your debt-to-income ratio, how to build your base of$100 ,000, millionaire mindset shifts, how to use debt like the rich do, as well is how to achieve an 800 plus credit score.

1:58Additionally, we are introducing private investment opportunities, specifically angel investments and pre-IPO investments that Robert and I partake in all the time. So by joining the Rich Habits Network, you get access to those investments. And we actually already shared one with our early access community members. So if you wanna jump in on that, be sure to join soon. You also get weekly coaching sessions with Robert and myself. We are always sharing research on stocks, ETF, and cryptocurrencies, as well as getting your questions always answered guaranteed. We have a whole section dedicated to answering your questions in real time.

2:32I mean, we could not be more proud of the infrastructure we've built for the Rich Habits community. So many of you people are always saying, love the podcast, but I want more. I want daily episodes. I want my questions answered. I want some live streams. How do I get more webinars, more this, more that? The Rich Habits Network does exactly that. Right now, to join the Rich Habits Network, it costs$77 a month. However, that price will increase to$97 a month starting on September 1st. So if you want to join and get grandfathered in at that low price, you need to do that before September 1st when prices go up.

3:05And we've had over 100 people join already. And it's looking like we're going to be at over 200 here in the coming days, if not week. And so it's just exciting because we're finally gotten it all together to give everyone what they want. And I'm excited about it because we're kind of combining all of our efforts and all of our best information forward in this community. So I'm super stoked and can't wait to really dig into the school community and engage with everyone involved. It's going to be a blast. So everyone, be sure to check out the link in the show notes below. It's going to say Rich Habits Network.

3:39You can also type in the URL, skool.com forward slash Rich Habits Network. It'll pop right up and you'll see a really fun intro video by Robert and I. All right, Robert, now that we've shared our fun announcement, What are we going to be talking about in today's episode? In this episode of the Rich Habits Podcast, we're going to be sharing with you how to prepare for a recession. We don't share this episode to scare you, but we certainly want to make sure you're well aware of what's going on in our economy today and how to prepare yourself for the worst. As you all might have seen, there have been countless negative headlines regarding the U.S.

4:14consumer. Airbnb lowered their revenue guidance by$170 million as consumers are stretched thin and just aren't traveling as much as the company had originally hoped. Amazon shared the other week that their customers are spending less and less on their platform as discretionary item demand like computers, electronics, and televisions have fallen off a cliff. According to new Experian data, the average credit card balance in America right now is$6 ,500. That's the highest it has ever been and is twice as high as it was in 2020. Additionally, the unemployment rate has risen to 4.3 % as the number of unemployed people increased by 352 ,000 people during July.

4:577.2 million total unemployed. And as you saw from our newsletter the other week, this recent increase in the unemployment rate triggered the SOM rule, which has 100 % accurately predicted every recession since 1980. Now, I know that's a whole lot of scary, and we're not saying we're in a recession or we won't be in one soon, but we want to make sure everyone has the knowledge and resources to act accordingly. So let's jump into it. I think that's the secret sauce, Robert. We publish these podcast episodes not to scare people. We want this podcast to be hope, to be the silver lining, to be the shining star in your week.

5:35Because we want people to have the resources, the knowledge, the education, everything they need to say, okay, I can only control what I can control. I can't control the economy. I can't control the presidential election. I can't control, you know, this, that, and the other mortgage rates. I can't control interest rates. But what I can control is how I react and be prepared for those specific things. And so this episode should act as a way for you to get a better understanding of what to expect, as well as how to prepare yourself in case one of these things actually happens, specifically a recession.

6:05Yeah, I totally agree. It's really all about preparation. We always tell everyone to not have knee-jerk reactions. And I think that's one of the important parts of these podcast episodes is helping people prepare so they're ahead of the curve and they know what's likely or potentially to come. And then that way they can make those adjustments. We always talk about active management of your money and not just letting it set it and forget it in a target date fund or some mutual fund. And this is part of that. This is part of that breakdown and that preparation to help everyone really know where to go and what to do during difficult economic times.

6:41So let's get into point number one, lock in on your money. That means making sure you not only have an honest budget, but you've already identified the unnecessary expenses you can cut out in a moment's notice to add some buffer to your savings rate. Additionally, this means understanding and being able to forecast exactly how much money is expected to hit your bank account before the month even begins. September is right around the corner, and do you know how much money you're supposed to make during the month? Because I do, and you need to make sure you do as well. You always hear me talking about idle money is dead money and you have to have it spoken for especially in difficult economic times beyond that you should also have a complete understanding as to when specific bills and subscriptions hit your account what day of the month does your phone bill hit what about your utilities do you know when they come out of your accounts and when do you usually do your grocery shopping if you're someone who's not constantly swiping a credit card you need to know how much money you have at specific points during the month to afford the things you want to buy.

7:44And if you are a credit card person, i.e. you pay off your credit card every single month, you should still understand what's happening to your money behind the scenes on a daily, if not weekly basis. I couldn't have said it better myself, Robert. Being able to forecast exactly how much money is expected to hit your bank account before the month begins is incredibly important. And not just know how much is coming in, but the day you get paid, as well as the day other bills are supposed to get paid out. When you do your grocery shopping, when the utilities are supposed to be paid, when your phone bill is due, when you have to pay for the babysitter or something with your family, right?

8:19Being able to know and forecast those specific days and understand where your bank balance will be is incredibly important, especially during times of economic uncertainty. Now, this is also a time that you should consider beefing up your emergency fund. Now, remember, your emergency fund should be anywhere between three to six months of spending in size. So if you spend$5 ,000 per month, you multiply that number by three to six, and that's how much cash you should have saved in this account. Now, if you're someone who's really trying to prepare for a potential looming recession, then you can multiply it by six, right?

8:54Just be done with it, beef it up a little bit, and give yourself a little bit of sigh of relief. So for example, I've got$35 ,000 in my own emergency fund and I feel pretty great about that. Now remember, the emergency fund should act as insurance. By having this cash sitting in an account for you, it's insuring you against selling your investments during times of uncertainty, likely for a loss, causing you to lose out big on long-term wealth building. You lose your job and you have to now cash out your 401k to pay for your mortgage. That is just a recipe for disaster. The emergency fund insures against that.

9:29We want to be buying during market turmoil and economic uncertainty, as that's where the biggest opportunities lie. But if you have to come up with rent money or mortgage money instead, because you're selling your investments, right, that just doesn't add up. Yeah, I love that breakdown, Austin. And another thing to consider that I see so many people do is during these situations, when they're not prepared with their emergency funds, they go back to the old credit card debt. They start racking up the credit cards. They get themselves in trouble. They have a lot of overdraft fees in their checking account.

10:01And that adds up as well. I once did business with a gentleman, and this is going to blow people's mind, that during a tough year, he had$181 ,000 in overdraft fees through his restaurant's bank accounts. So because he was undercapitalized, he had that many overdraft fees. So don't do that. It's so important, even on a small level, to make sure that you have that emergency fund built up so you don't get in a situation where you have overdraft fees or worse, you're running up your credit cards. So let's get into talking point number two, diversifying your portfolio. We talk about bonds, we talk about gold.

10:38And one of the things that I really like in Austin, you're really good at is seeking out the picks and shovels, looking for those opportunities in the sectors that we see moving forward are going to be strong for us. And I think that's really important for everyone to understand, especially if we do head into a recession and we get greater recessionary tales moving forward. And you all know how much we love diversification. And during times of economic uncertainty, it's an even better idea. You all heard from Jay Jacobs, the head of thematic and active ETFs at BlackRock, in last week's episode, share with us a flurry of secular growth trends that recession or not will continue to propel spending and economic activity up and to the right.

11:20He also shared with us a ton of ETFs to look further into, including IDU for utilities and IDGT for data centers. Yeah, I think that was an awesome episode. So if you guys not check that one out, you're going to love it. We got a lot of positive feedback on it, specifically with how analytical it was. And something else worth looking into was the historical price appreciation that gold experiences during rate cuts by the Fed, as the Fed historically cuts rates when there's a recession and recessions tend to cause the price of gold to increase. So keep that in mind. You can add this to your portfolio by purchasing GLD.

11:54It's just an ETF that you can get on any brokerage or you can go to Costco and buy some physical gold over there. And finally, and this is what Robert alluded to, public.com just released something that I think is revolutionary for a lot of people's portfolios. And that's the corporate bond account paying a 7.3 % yield. So you can lock in a 7.3 % yield for years to come, paid out on a monthly basis because these corporate bonds are paying at such a high rate when compared to the T-bills by the Federal Reserve, right? So what happens is companies like Apple or Microsoft or Amazon, they go raise billions of dollars of debt via bonds and they put a 5, 6, 7, 8, 9, 10 % interest rate on that bond.

12:35And we're the ones that are buying those bonds from them and receiving those interest rates and those coupon payments. So go check out the link in the show notes below. But I just can't wait to get my hands on this new awesome product. Because if you think about a diversified portfolio, Robert and I talk about adding some T-bills at that 5.4%. But imagine adding bonds now at 7.3%. It's pretty cool. So that's a fun product and I'm excited to go check it out for sure. Yeah, I think it was just announced a couple days ago. And I'm so excited to get involved there. You guys know we love Public. They just put out such great products.

13:07And I think the timing of this product is fantastic. Lastly, and most importantly, you need to understand how a recession might negatively impact your employer's business. If you're working at a technology company, you need to ask yourself, are people going to still buy and use our products if their spending power is stretched thin? While if you're working at a hospital as a nurse or something else, you can probably breathe a sigh of relief. What's important to know here is what a recession might do to your job. If you're in the marketing department, you might be in trouble as marketing dollars are the first dollars cut when recessions take place.

13:43While if you're in the sales department, you might be in a better position and have more job security. I mean, I can't say this enough. If you are working at a startup company or a company that, you know, isn't publicly traded or might not have that much funding or, you know, whatever might happen here, you need to be prepared. Polish up the resume, you know, start getting yourself out there a little bit more on LinkedIn. I'm not saying you're going to lose your job, but what's really important to know is that it could be on the table as cuts begin to come down to the bottom line. It's also important to look at your company's career site.

14:17So, you know, if you're working somewhere that's hiring more and more people or if your company is looking to make cuts and save money anywhere they can. So if you go to the career website and it's full of a bunch of open positions, that's a good thing. If it has no open positions and you guys aren't hiring, that might not be a good thing, right? You guys all might be stretched thin. So by understanding how your employer might be impacted by a recession, you're going to be positioning yourself for success if we do see said recession. Now, additionally, if you're a small business owner, you need to be doing this type of analysis for yourself, period.

14:47If you're selling a high ticket service to homeowners, for example, and it's paid for by the homeowners themselves, If that's a refrigerator or you guys do kitchen remodels or you're selling something for the backyard landscaping or whatever's going on, maybe you're a pool salesman, right? Are you going to be in business when those same people that are having trouble paying for their groceries can't buy a high ticket item from you, right? They have to go into high interest debt. So that's what I'm trying to make sure you guys all understand here is like, do you work for a company who sells directly to US consumers?

15:15If so, is that specific item that your company sells to consumers, is it a discretionary item where it's like, yeah, throw this on the credit card or I'll take out a loan for it? Or is this an item that everyone's always buying? Groceries, different types of insurances, healthcare, things like that. And actually, Robert, a fun example to even think about here was the used car or just car market over the last, call it four years. We saw everyone have a bunch of cash in their bank accounts from the stimulus checks, low interest rates. The stock market was ripping in 2020 and 2021. So car prices were inflated because that's the first thing people go out and spend their money on.

15:50But then once the opposite happened, a little bit of austerity in 2022 and 2023, interest rates rose, unemployment rose. Things like that are negatively impacting the American consumer right now. Used car prices are crashing. People aren't selling cars at all because those are high ticket items. So if you're a used car salesman, you've probably already experienced this or any car salesperson. You've probably already experienced this with your business. But I just want people to understand that, like, if you're selling a high ticket item to U.S. consumers, like they have to go into debt to buy it.

16:16You need to have a game plan. Yeah. And I think the important moral of the story here is, like we talk about in a lot of episodes, is getting ahead of the curve. Understanding what's to come, what's potentially to come. And looking at your situation and doing a complete overhaul. overhaul, what do I need to change? Am I in good shape? Do I have the emergency savings saved up? And then understanding your job and or your own business to make sure that you're bulletproof during these tough times. Because even if you look at like restaurant owners right now, they're getting pummeled because food costs are so high.

16:51And then you look at some other people where they're getting pummeled because insurance costs are so high. So it's all about preparation and getting ahead of it just so you don't find yourself in a bad economic situation during a downturn in the markets. Couldn't have said it better myself, Robert. I just want to make sure everyone knows that we're not over here trying to spread some heebie-jeebie, bad news, scariness. What we want to do is make sure you're prepared, right? We want to make sure that you get locked in on your money. You understand what you're spending. You understand what you're making.

17:19You understand when some of these bills hit your account every single month. We want to make sure you're diversified, right? Once you've built your base, it's important to diversify, especially now that public has shared this new corporate bond account that's paying 7.3%, like that's an awesome thing to add to the portfolio. Call it 5%, 10%, maybe 15 % weighting depending on how much fixed income you like. Picks and shovels are always a great idea. Robert, you know, we talked about this with Jay Jacob, but I want to reiterate how important it is to be investing in companies that are experiencing secular growth trends, right?

17:48Apple, Amazon, Google, Meta, Microsoft, they're all spending hundreds of billions of dollars a year developing AI infrastructure. Who do you think they're giving that money to? and what companies are now going to receive that money as profits. And how do I invest in those companies, right? The picks and the shovels that we talked about here. And finally, Robert, just like what you said, how important it is to understand how a recession might negatively impact the company you're working for, which means you might lose your job. Now, Robert, we talk a little bit about diversification with the bonds and the gold and the picks and shovels and these secular growth trends, but we're not talking enough about masterworks because new Deloitte data has found that nearly 58 % of wealth managers' clients consider their art collections as part of their overall estate planning strategy.

18:34And UBS released a report that nearly 40 % of ultra-high net worth collectors are allocating 30 % of their wealth to artwork. Well, I guess it's a good thing that we're partnered with Masterworks then, isn't it? We're not saying that any of you need to allocate 30 % of your wealth to art investing, of course, but we love, love, love diversification on this show. And Masterworks has over 950 ,000 users and nearly$1 billion in assets under management for a reason. Because diversification into art makes a lot of sense for a lot of people. Including Robert and myself. We're both investors in Masterworks and I've personally been on the platform since I think it was 2019.

19:12So I'm going on five years now, Robert. Now since inception, they've had 23 exits, each of them individually delivering a profit to their investors. And not counting works still in holding. They've distributed over$55 million total back in investor proceeds, which is incredible. It is. Masterworks gives you a chance to invest in shares of multi-million dollar paintings by artists like Banksy, Basquiat, and more. And in honor of the relationship they have with Rich Habits, they let our subscribers skip the waitlist by going to masterworks.art front slash rich habits. That's masterworks.art front slash rich habits, which is also shown in the show notes of this episode.

19:51As with any investment, past performance is not indicative of future returns. Investing involves risk. Important regulation aid disclosures can be found at masterworks.com front slash CD. Again, guys, we only share opportunities and sponsors and things like that on the show that Robert and I believe in. Again, I have been a user of Masterworks since 2019. I remember seeing it as an advertisement on Morning Brew's newsletter back when I was working in corporate America and I thought it was the coolest thing. Artwork is great. It's a great way to diversify your portfolio, especially when we experience crazy volatility like we did just the other week.

20:27Now, Robert, I'm pleased to announce that our first question in the Q &A section of this episode is coming from the Rich Habits Network. If you post a question in the Rich Habits Network, we're either going to answer it inside the network on this platform or bring it up and answer it on the episode. That is guaranteed. We will always do that. So Matthew W. is our first question. He was one of our early members of the Rich Habits Network. so we're very excited to answer Matthew's question. Matthew says, Hey everyone, I'm keen to hear your thoughts on a few topics, but I'll start with this one. I'm 53 years old.

20:58My income has definitely taken a hit since the pandemic, so my ability to continually invest into the stock market has taken a hit as well. My wife and I did hold stocks and investments, but we sold them all and we bought an investment property in Kansas City instead. We bought it in July of 2022 and it's been a very painful experience while we've tried to stabilize the property, which we think we're finally close to doing. Now, the property has appreciated about$100 ,000 since, and we have just over$300 ,000 in equity. Now, here's the deal. My question is, should I sell the investment property and invest the$300 ,000 of equity into cryptocurrency, specifically Bitcoin?

21:35Or should I just continue to hold the property for a long time? We also own two other investment properties, and we're really excited about real estate investing as a whole. Robert, I'll take a stab at this one. I think it's pretty kind of cut and dry, Matthew. I mean, let's pretend you sell the property. If you sell the property and you take$300 ,000 and you invest that all into Bitcoin, will you be breaking our rule of Bitcoin allocation? We always talk about how people should have Bitcoin in their portfolios. That's great. We all have Bitcoin. Robert and I love Bitcoin and we think it's a great way to diversify your portfolio.

22:07Bitcoin sharp ratio is very interesting. They have a very interesting beta, right? It's very cool of an asset class. However, we only think people should have between 5 % and 15 % of their total net invested capital into Bitcoin. And that's because Bitcoin is also a volatile asset. We've seen Bitcoin move down 70 % in a couple months, as well as up 300 % in a couple months. It's a very volatile asset. So by having 5 % to 15 % of your net worth inside of Bitcoin, we think that is an awesome allocation. Something else that's interesting too, is you mentioned you have two other investment properties.

22:41I have no idea how much you have in those properties, how stable their rents are or anything else like that. So if you did want to sell this property because it's been a nightmare and you're up in the green by 100 ,000 on it, I wouldn't be mad at it because you still have two other properties. Robert, what's your take on this situation? Yeah, I think you nailed it. For me, it's always important. I love the sound of$300 ,000 being invested into cryptocurrency, but that would only make sense if you had$3 million in net invested capital, because we wanna keep you around that 10 % in cryptocurrency, maybe 15%, depending on your risk analysis and how you feel about it.

23:19So for me, it's a little difficult. I would rather make sure you had your base, which we don't know what that is. You could have millions of dollars, but look at it from this perspective. The easy thing for you to do is take what you have right now from an invested capital across all of your different assets and then go, okay, I'm going to take up to 15 % of this 300K is going to go towards the crypto portfolio. That's where you want to be. We don't want to see you only have$300 ,000 plus whatever you have in the 401k and just go all in on cryptocurrency. It could work out, but it might not also work out.