How to Survive the Recession and Profit from It

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bonpay

21 min readSep 12, 2018

In the first two quarters of 2018, the value of Turkish lira has dropped by almost 50%. In August alone, the price fell from 0.20 USD to 0.14 USD, and despite all the efforts of the official Istanbul it refuses to stabilise above that point. The whole country is in a massive economic crisis that is only getting worse.

Last year, a similar, but more severe, crisis hit Venezuela. In 2014 it was Argentina, and it’s possible that an encore is coming soon. At least four other countries — Republic of South Africa, India, Brazil and Indonesia — are deemed at risk to follow suit. And each time the hyperinflation hits, the residents of the country are forced to either become broke or transfer their value to a different kind of asset.

One of these assets is cryptocurrency. During the peak of the crisis, the price of Bitcoin on Turkish exchanges reached 7100 USD — or a 500 USD premium. And yet, people kept buying. Even the first time Bitcoin was really noticed by the mainstream audience was related to the 2014 economic crisis in Argentina.

In this article we will explore:

The indicators that allow predicting the upcoming recession;
The survival and budgeting during a recession;
The investment and saving opportunities;
The reasons why cryptocurrency becomes popular among investors during the economic crises.

How to spot a recession before it hits

There are many indicators that we use to spot the economic recession. However, the most reliable ones are not available to the public. For example, it’s nearly impossible to see the relevant metrics for:

Amount of unpaid banking loans;
Revenue brought by the taxes;
Amount of fraud in the financial industry;
National unemployment rates;
Amount of the outward migration.

The government publishes the annual datasets for most of these metrics, but annual or even quarterly doesn’t cut it — inflation can happen in the matter of months or weeks. To stay up to date, you have to track the publicly available metrics and make educated conclusions based on them.

High Credit Interest Rates

Credit interest rate in Turkey. The rate increase in 2018 corresponds with the inflation of the Turkish lira.

How it works. Bankers want their money to work. To do so, they give away most of that money as credit — preferably to many different debtors to minimise the risks. And to attract more customers, they drive the credit interest rates down.

What changes during a crisis. Since the economy is becoming destabilised, crediting becomes a risk. Moreover, the previously issued credits that are due to be paid become much less reliable investments. To cover the losses from the bad debtors, banks begin to increase the credit interest rates.

Credit interest rate in Turkey. The rate increase in 2018 corresponds with the inflation of the Turkish lira.

How to check it. Banks advertise the rates on their websites. You can also use aggregator websites like Money.co.uk, but they often have outdated data. If you are watching out for a recession, start checking credit interest rates in your national banks weekly.

Why you should trust it. Bankers usually know about an incoming crisis before the rest of the population — after all, it’s their job.

Decreasing House Market

The housing market crashed during the economic crisis in Turkey, but it is slowly recovering.

How it works. Houses are a necessity — everyone wants to own a house, or at least to rent one. They are also an investment — and a reasonably reliable one since the world population growth reliably increases their value.

What changes during a crisis. While housing remains a necessity, the number of people that can afford it drops. House owners catch wind that their investment is unaffordable to the population and drop the prices too, to recuperate at least some losses.

The housing market crashed during the economic crisis in Turkey, but it is slowly recovering.

How to check it. Have a habit to check the housing price in several large cities of your country. For the UK you can use London, Edinburgh and Belfast — they are reasonably large and far enough from each to negate the local disturbances as a factor. If you see the downward trend in all three markets — that’s a dead giveaway of an economic crisis.

Why you should trust it. The rules of the free market are hard to influence. Whenever you see a necessity dropping in value, you can safely assume that something is wrong.

Abandoned Construction

Seseña — a construction project in Spain, abandoned due to an economic crisis of 2009.

How it works. Investors give money to the construction companies intending to receive a part of the profit from the sale/rent of the completed object. They are genuinely interested for the building/district to be completed — otherwise, they’d have to sell it at a massive loss.

What changes during a crisis. Investors stop giving money to the building companies and the housing market freezes because they have no need in the objects they can’t sell. Moreover, they begin to pull the money our, suspending the ongoing construction.

Seseña — a construction project in Spain, abandoned due to an economic crisis of 2009.

How to check it. It pays off to keep an eye on large construction projects — housing projects, corporate skyscrapers etc. Even one of them becoming abandoned before completion is a warning sign. Multiple objects all over the country are a full-blast alarm.

Why you should trust it. Since big-time investors have better information channels than the general public, they usually redirect funding before you even know something is wrong.

Decreasing Temporary Job Market

How it works. Construction workers, human resources specialists, drivers, accountants and customer service representatives are the bulk of the temporary job market. And you need these people to run a successful business.

What changes during a crisis. During a recession, the production and entrepreneurship in the country are decreasing. This means, that the new positions on the market are not being created — despite the old contracts running out and people being let go.

The employment rate tanked in Spain in 2008 due to the destroyed temporary job market.

How to check it. Your local Craigslist will do. Just keep an eye on the number of temporary job offerings posted and take note when it starts to trickle down. You can also use specialised portals — like Indeed.com and its local versions.

Why you should trust it. The temporary job market is necessary for many industries. If it suddenly begins to struggle, then the crisis goes beyond a single industry and will probably lead to a recession.

Bonus Indicator #1 — Gas Price

Gas price increases are a good indicator of the state of the economy, but many other things can influence them too. Seasonal changes, the cost of oil, local regulations and dozens of other factors can impact the price of gas the same way a recession would.

At the end of the day, it is not reliable enough — but worth looking at, if you need to confirm results from other sources.

Bonus Indicator #2 — Stock Market

State of the stock market is a reliable and easily checked metric for an economic recession. However, it is more useful for market analysts, historians and economic researchers.

If you can see a nationwide stock market crash, your economy is already in shambles.

Bonus Indicator #3 — Sales of the cardboard boxes

This is a funny metric, but it is reliable. Enterprises use cardboard boxes to store their produce, so if the sales of the cardboard boxes drop, then enterprises are reducing or stopping production. The only reason for that is if the people stop buying — and the only reason for that is an economic recession.

Just like with the state of the stock market, this metric becomes apparent only after a recession has officially begun. There is no point in tracking it prematurely.

How to survive the economic recession

If you have run the indicators listed above and they came back positive — don’t panic. An economic recession is a massive crisis, but you can manage it if you make smart decisions.

Let’s go over each of these points in a more detailed fashion.

How to diversify active income during a recession

A recession does not just mean that your money becomes less viable. Due to the people in your country losing the buying capacity, the companies enter the cost-saving mode. Which means layoffs, cut hours and even corporate bankruptcy. In other words, you, along with many other people, may lose your income source.

Overall, there are 6 job security tiers during a recession:

The foreign outsourcers. Working for another country is not all that pretty — you get weird hours, language and culture barriers, worse treatment and payment than the local employees, and many other hardships. However, since you are dependent on their economy and not yours, you will be among the happy few not affected by a recession directly.
The necessary professions. If you work for the government, or for a utility company, your position is probably fine. While the pay isn’t good and is going to become even worse, people will need you during any crisis and will pay you for your work.
The unnecessary professions. If you work in marketing, publishing, restaurant industry, entertainment industry and other industries that do not directly contribute to survival — you should start worrying. These are the first things people will drop when money becomes tight.
The boom-dependent professions. Construction, recruiting, logistics and some other industries depend on the healthy economy. During a recession, they lose the majority of their customers and begin massive layoffs. If you work here — it’s not going to be easy.
The small business owners. Owning your own business means owning all the risks — and they are aplenty during a recession. Your customer base will dwindle and lose buying capacity. Your taxes will skyrocket in a desperate attempt to squeeze more money out of you. Your rent and utility bills will increase because your currency will lose value. At the end of the day, it all depends on the industry — but most businesses exit a recession either bankrupted or heavily in debt.
The independent contractors. The primary customer base for independent contractors is a small business — and a small business gets demolished by an economic recession. Expect delayed and missed payments, disappeared or bankrupted customers and a lot of headaches.

If you are in a danger tier, you need to come up with some way to survive if your job gets shut down. Which means you need a second job.

5% of American workers have a second job, based on the data from The Department of Labour. This number is growing.

It doesn’t have to be full-time — but even a 10 hours/week minimum wage gig will help you immensely. Not only with those 300 USD/month, you’ll make there, but with the overall sense of financial stability, it will provide. But McDonald’s is not the only way:

Try to monetise your hobby. For example, if you are crafty — look up Etsy. Selling your craft will provide you with a steady income during a recession.
Look into freelancing. If you are a graphic designer, coder or writer — you might be able to get customers online. Look up Upwork, Fiverr and other freelancing platforms. Also, check out the u/SuperSecretSpare’s guide to making extra $1000/mo online.

Once you have your income locked down, it’s time to look into your expenses.

How to maintain a budget during a recession

A budget is a list of your monthly expenses. You are going to need it to determine whether or not you can survive a recession. To determine the budget, you need to know your monthly net income and your average monthly expense.

How to determine monthly net income

Net income is the amount of money you actually get to take home after the income tax has been paid off.

For example, if you are a UK citizen and made 2000 GBP last month, then this is your gross income — as in, income without any adjustments. You should subtract from it a 20% basic UK tax rate, bringing your net income to 1800 GBP.

To check the average gross and net income in your country, see Numbeo.

How to determine monthly expenses

Write your expenses down and separate them into three columns:

Fixed is for all expenses that have a fixed cost. Rent, insurance (car and health), existing debts and other necessary expenses — all this goes in the fixed column.
Flexible is for expenses that you can control. Electricity, water, heating, groceries, gas — all this goes in the flexible column.
Unnecessary is for the expenses that you can live without. Phone, internet, new clothes, gadgets etc. — everything that is not required for your continued existence goes here.
NOTE: If you need something from this column for your job — for example, internet connection — move it to the previous two columns.

If you cannot evaluate your spending categories and amounts — start a spreadsheet and write down each payment you make for a month. You can also use a smartphone or PC app for that, i.e. Monefy or YNAB on Android, Expense and Mint for iOS.

Here’s an example list of expenses for a single New Yorker:

Note that this budget does not include health insurance (i.e. it is provided by the employer), car maintenance and irregular expenses like clothes and gadgets. It also does not list any extensive debts. And yet it still goes way overboard the national average of 3030 USD net income.

How to adjust monthly expenses

Our exemplary New Yorker must have a decent job that pays more than the average — but that may change during a recession. Then, the budget will need to be adjusted. It has to be done on a case-by-case basis, but here’s an example:

Drop all unnecessary spending or cut down hard on it;
Find a roommate for the apartment or move to a cheaper location;
Sell the car and use public transportation (it will be hard, but they’ll live);
Take their own lunch to work. YouTube videos can teach to cook fast, cheap and healthy — i.e. StruggleMeals series by Tastemade.

By following this advice, our example can adjust spending to 2400 USD per month — which is a little over New York’s minimum full-time wage. Further adjustments are definitely possible, but require additional information about their financial and living situation.

SIDENOTE: If you need help in adjusting your budget, there are two great communities on Reddit — r/PersonalFinance and r/PovertyFinance, the latter more thrifty in its approach. Just post your budget and your financial situation to either or both of them, and you will receive advice from experts or people who have been in the similar position. For example, here’s how they recommend you save money on groceries.

How to establish an emergency fund

An emergency fund is your money for a rainy day. If you get fired, get sick, crash your car, etc. — you can fall back on your emergency fund to bail you out. And since a recession is a definition of a rainy day, you need to start your emergency fund right now.

Tighten and adjust your budget if you can.
Determine how much money you have left after all the necessary expenses are covered.
Put at least 50% of that money towards the saving account, use the rest on unnecessary expenses.

The more conservative advice is to put all your “free” money toward savings — but it leads to a loss of motivation and decreased income in the future. 50% is good enough and allows you to live your life at least a little, providing you with an emotional outlet.

Where to store an emergency fund

The whole point of the emergency fund is that it is available to you immediately — which makes cash the most sensible option. However, storing large amounts of cash in your home is not a good idea. Not only will this money attract potential burglars, but it will also slowly lose its value due to inflation.

The best way to store your emergency fund is a savings account with instant access. Such accounts have lower interest rates — but those rates weren’t any good to begin with. You should also consider making this deposit in a foreign currency — for example in USD. This way you will be safe from the inflation of your national currency.

An emergency fund is a long-term affair. If you put away $100 a week towards it, in a year you will end up with $5333 — or two-and-half months of the minimum wage in New York. So think about it now, and put away as much as you can.

How large should an emergency fund be

An emergency fund should not grow indefinitely — that would be counterproductive and result in missed income opportunities. You should limit it to some amount based on your minimal monthly budget (a.k.a. amount you need to cover your fixed and flexible expenses):

If you are living alone and nobody depends on you financially — keep saving in the emergency fund until it reaches your 3 minimal monthly budgets.
If you have someone depending on you, it pays off to save a little more. For example, 6 minimal monthly budgets.
If you are in a danger zone for a recession — i.e. working construction or HR — aim for 12 minimal monthly budgets.

FACT: 61% of American families have an emergency fund of $1000 or less. The main reason is poverty and a difference in financial judgement that comes with it. However, you should still struggle towards proper solutions, to break the cycle of poverty.

Once you have maxed out your emergency fund, do not stop saving money. Instead, put it towards paying your debts early.

How to pay off debts early and efficiently

An average UK citizen is 8 000 GBP in debt — including credit cards, mortgage, car payments, credit cards, student debt etc. It’s not even that bad — an average American owes 67 000 USD. And having any debt during a recession is terrible since it diverts precious money away from your wallet.

This means, that once you are done establishing your emergency fund, you need to focus on paying your debts early. There are two ways to do so:

By the lowest amount of money owed. Tackle your smallest debts first, decreasing the count of your debts quickly.
By the highest amount of interest paid. Tackle your most expensive debts first, decreasing your overall debt.

The second approach is much more effective — however, Dave Ramsey insists that it leads to the loss of motivation. So pay the most expensive debts first, but if you feel that you are not doing anything and not contributing — switch to Dave’s system, knock out a couple of smaller debts and come back.

Once you clear your debts — congratulations, you are ready for a recession (and pretty much any other disaster). Now all your money is yours to spend — or invest into passive income.

How to invest and diversify investments during a recession

Investment is an allocation of money with an intent of receiving a benefit. It is by far the best way to gain passive income and eventually phase out the need to work a job entirely. However, investments take time, and not all of them are successful or safe.

What are the traditional investment opportunities

There are two types of investments:

Lending investment. A lending investment allows you to become a bank and lend money for interest.
Ownership investment. An ownership investment allows you to purchase something with an intent to sell it later for a profit.

Both have their uses — lending investments are usually more safe and convenient, while ownership ones are risky and more profitable.

NOTE: A truly profitable investment needs to outrun the global inflation rate of 3.05%.

Bank deposits

The average deposit interest rate in United States. It hasn’t outpaced inflation since the 1990s.

Type. Lending.

How it works. You store money in the bank, bank loans that money to someone else, and you get paid dividends from that debt.

Benefits. It is the safest and most not-involved way of accruing interest on your money. Just show up at the bank, open an account, give them the money — and you are an investor.

Unlike the casual debts between acquaintances, the bank deposits are insured by the bank. Even if the debtor bankrupts on the debt, you will receive interest while the bank will swallow the loss.

Disadvantages. Bank deposits provide rather modest interest rates. We are talking 1–5% annual interest — below the actual inflation. Banks also do not fare well during a recession. If your bank goes bankrupt on your deposit, you might not see it again for years — or at all.

How to invest. Go to your bank, they’ll handle everything from that point on.

Profitable? No. You should be using this for your emergency fund, but it is a bad investment of your actual savings. There is literally no chance of profiting from a deposit account.

Government bonds

The average yield for the United States Treasury Bonds. Despite a significant rise in the last two years, it still does not outpace the inflation.

Type of investment. Lending.

How it works. A government wants to borrow money from the citizens, so they issue official debt obligations that you can buy. Afterwards, they pay you a certain amount of money annually, called coupon rate, until the bond’s term is over.

However, bonds are sold at the auctions. And since the bonds with higher coupon rates are more preferable, they sometimes go at the price over their nominal value. This creates the concept of yield — the amount of profit that can be netted from a single bond purchased at the auction price.

Benefits. None. During a recession, some governments actually default on the debts to their citizens first. See the list of sovereign defaults on Wikipedia and sort by date.

Disadvantages. Horrible interest rates. They can not keep up even with the casual inflation.

How to invest. Go to your nearest bank, they’ll either set up an account for you or recommend a local broker.

Profitable? No. Steer clear of them.

Corporate stock

The value of the United States stock market, represented via the Vanguard Index Fund. The annual growth in 2017 is around 20%.

Type of investment. Ownership.

How it works. The stock is proof of ownership in the company — and a right to a share of profits. Moreover, a stock has an intrinsic value of its own, connected to the public image and performance of the company.

Benefits. The stock is tied to a real-world product, which means that it retains value. If the company is doing well, you can expect a sizable increase in your stock value.

Disadvantages. If the company you picked fails and loses market value, so does your investment. Which means that you should either stick with the safe choices, learn how to invest or hire someone to manage your investments.

Also, you should not be investing in your local companies if you think a recession is coming. Their stock price will drop hard with their national currency, and you will be left with a fraction of your investment.

How to invest. Set up an account with an online broker. Both Fidelity and TD Ameritrade are fine. If you are not a US citizen, you’ll have to provide a lot of documentation, so prepare for that.

Profitable? Yes. As long as you invest in large foreign companies, you will get your money back with some decent interest.

The value of one ounce of gold in the last five years. The constant annual growth hasn’t been seen since 2011.

Gold

Type of investment. Ownership.

How it works. Just like with the corporate stock, you can purchase a right to own a certain amount of gold. Or you can purchase gold itself and store it in a safe.

Benefits. Since gold is limited, it steadily grows in value as the world’s resources are depleted.

Disadvantages. The last couple of years have been hard on gold, with it barely retaining value. So while theoretically, it should grow, for many different reasons it just doesn’t.

Also, the buying and selling prices for precious metals are incredibly different.

How to invest. Set up a stock market account (see above) and purchase the stock of ETF Securities Physical Gold. Alternatively, go to your bank and purchase actual gold ingots and coins.

Profitable? No. Unless you are in it for the long game and can wait for a decade or two, even bank deposits are more profitable than gold.

Real estate

The average house value in the United States, represented via the Zillow Home Value Index. The annual growth in 2017 is around 20%.

Type of investment. Ownership

How it works. While housing loses value during a recession, it loses it far slower than the actual currency — provided that this housing is located in a popular location.

Benefits. Housing is a compelling long-term investment. If you buy at the dip, your house will become very profitable once a recession is over and prices are going up.

Disadvantages. Value highly depends on the state of the housing market. Also, houses lose value even by themselves, because it will eventually need repairs or complete renovation.

How to invest. Buy a house. Simple as that.

Profitable? Maybe. There are risks, and unlike stock, there are no safe choices. But if you want to, you can try.

How to invest during a recession

As you can see, the majority of traditional opportunities are underperforming even without a recession. The single viable investment option is stock market — unreliable, but at least somewhat profitable.

The main trick to the stock market is to make the investments safe, but still profitable. To do so, you need to think about your stock portfolio and build it correctly. Here are some companies that have somewhat stable stock price growth:

Amazon. Amazon’s growth is hard to believe. In the last 12 months, the company has doubled its stock value — and reached more than 1 trillion USD market cap.
Apple. Apple’s stock has been on a steady rise for the last couple of years. Despite somewhat regular dips and spikes, the overall annual growth is around 40%.
Nike. Nike has a more tumultuous stock history, but on the larger scale, it always does right by their shareholders. Their annual growth also reaches 40% quite regularly.

All of these companies are considered “safe” investments — you won’t become the millionaire from a single share, but your investments will outpace the inflation by a healthy margin. However, even the most safe companies can lose value — which is why you can invest in the market itself.

Vanguard. Vanguard is a total index market fund. They invest in all publicly traded US companies and thus grow at the same pace as the market itself. In the last 12 months, Vanguard has grown by 20%.

Using these 4 investment points, you can already design a basic portfolio:

Invest 40% of your total investment budget in Vanguard.
Invest 60% of your total investment budget in Apple, Amazon and Nike equally.

This division is necessary to ensure that you will not lose all your money if one of the companies goes down. And even if all three go down, you will still have your investments in the market itself.

However, there is another, unconventional investment opportunity — cryptocurrencies. And there’s a reason why they are becoming more and more popular lately.

Why invest in cryptocurrency during a recession

Cryptocurrency was created in 2008 as an alternative to the fiat economy. It is backed up by the proof-of-work and operates on the blockchain — a digital ledger that stores every transaction and is unhackable.

NOTE: Learn more about the history and mechanisms behind Blockchain and cryptocurrency history in “Why Fiat Money Fails and How Bitcoin is Better“.

Despite its precarious nature, cryptocurrency has been an investment of choice during the last three significant recessions — Turkey, Venezuela and Argentina. That’s because it offers some major advantages over the traditional investment opportunities.

Cryptocurrency is relatively anonymous. Nobody will know that you hold crypto — not even your government. Unless you leak this secret yourself, which would be very unwise.
Cryptocurrency is unregulated. While your local government may prevent its citizens from investing in gold, they can not prevent you from investing in cryptocurrency.
Cryptocurrency is easy to transfer. Sales of stock or precious metals take time to set up. With crypto, all transfers take less than ten minutes — and that’s on a busy day.
Cryptocurrency is profitable. It may be quickly forgotten, but everyone that purchased crypto before November 2017 is in the green — and is only getting richer. And if they bought in 2014, their investment has grown by 1000%.

Of course, there are also disadvantages — but most people are willing to accept them when their national currency is at an even worse stage.

Cryptocurrency is volatile. It might all even out at the end, but the Bitcoin price tends to spike and dip regularly. If you bought at the spike — i.e. in December 2017 — your cryptocurrency will be losing value for a while.
Cryptocurrency is legally grey. Some countries — like China and Russia — do not approve of cryptocurrency and attempt to ban it or heavily regulate it.
Cryptocurrency is complicated. You need some technical knowledge to use crypto. Although, there has been good progress in this field — like cryptocurrency cards.

At the end of the day, it’s up to you whether or not you want to invest in cryptocurrency. It is a risky, but desirable and profitable investment.

SIDENOTE: Before investing in crypto, check out How to Safely Buy Bitcoin and Avoid Scammers.

Conclusion

A recession is not something to shrug off — it is a massive problem that will affect a country for years or even decades to come. However, it is not the end of the world. And by following this guide, you will survive it and maybe even profit from it.

Just don’t forget about financial security and common sense. If you have questions, or are struggling with some parts of the guide — feel free to reach out in the comments.

And if you want to know what actually causes the recession — check out “Why Fiat Money Fails and How Bitcoin is Better“.

DISCLAIMER: Nothing shared or published by Bonpay can be treated as an investment recommendation, nor should any data or content published by Bonpay be relied upon for any investment activities. Bonpay strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decisions.

Originally published at bonpay.com on September 12, 2018.