I know that times are scary. I know that the markets have dropped. That travel is coming to a screeching halt. That American sports have largely shut down. That people are sick and dying. That misinformation, political jabs, and general ridiculousness are flying around on social media. And I also know that this disease, COVID-19 aka coronavirus, is a real existential threat to potentially millions of people. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free BiggerPockets is responding, and I personally am responding. We understand that this might not be of pressing concern to many individuals here on BiggerPockets. We know that most of you are under 60 years old and in good health—and for the most part, folks in our demographic aren’t in danger. But we all come in contact with those who are. I recently closed the BiggerPockets office. I am taking steps to avoid contact with other people, so that I personally am not an unwitting carrier, spreading it to those who are susceptible. But I am no expert on infectious diseases and can only trust the world’s leading expert, Dr. Anthony Fauci, and implement his recommendations. However, as an investor, avid student of personal finance, forum contributor, host of the BiggerPockets Money Podcast, author of Set for Life, and CEO of BiggerPockets, I will offer my opinion on how we should think about reacting to the current economic climate. Businesses like ours are closing their offices. Those who can will work from home. Outside of those lucky enough to not be directly affected more than that, know that for millions, school closings and layoffs of hourly workers are already in effect. The market has plunged, and the government is taking extraordinary measures. Is a recession coming? Is it already here? If it’s here, how long will it last? I don’t know the answers to these questions. But luckily, we don’t have to know the answers to these questions in order to know what we should be doing financially. Having a strong financial position is a lot like maintaining good health. If you eat correctly, manage your sleep, exercise, brush your teeth, and maintain appropriate hygiene, your risk of becoming sick is low, and your risk of lasting consequence from any illness is even lower. If you track your spending, spend less than you earn, maintain an emergency reserve, and invest consistently but not aggressively for the very long-term, then similarly, your risk of going into debt or having to sell off investments at a market low point is low. And your risk of bankruptcy or accumulating bad debt is even lower. Which brings me to the point of this article. Related: Yes, I’m Afraid of a Real Estate Bubble—But I Continue to Invest Anyway. Here’s Why. If you are here on BiggerPockets, it is likely that you aspire to attain early financial freedom—the ability to permanently (including in a recession) retire from wage-paying work and never have to rely on a paycheck again to support your lifestyle. As a part of this, you have naturally been preparing for a recession for the entire time you’ve been working toward early financial freedom. This article, in that case, will simply be reassurance that you’ve been doing the right thing. For everyone else, I hope that this article is the kick in the pants you need to begin aggressively getting into shape financially. 5 Steps to Preparing for Recessions (and Financial Freedom) 1. Track your spending I use Mint.com and make virtually all my purchases via credit card. Everything is processed automatically, and at the end of each month, I review my spending, categorize that which Mint does not automatically categorize for me (which is most of my spending), and analyze where my money goes. I know when I spend too much on “alcohol and bars” or “restaurants.” I know my spending on “auto and transport,” “travel,” “groceries,” and “entertainment.” I know when I’m getting a bit out of control and where I spend reasonably. If you don’t already do this, it’s time to do the same. Look, I don’t care if you have a budget and stick to it. But if you can’t even track your spending, then I know that you are leaking money out of your life unnecessarily. Even with tracking spending and making adjustments, I am always astonished at the waste that I can personally cut from my budget. This is easy. It is five to 10 minutes to set up and five to 10 minutes a month to maintain. It puts you in the driver’s seat. It can help you immediately begin accumulating more cash to shore up your financial position or to invest with. If you aren’t already doing this, or haven’t been, it is time to start. 2. Spend less than you earn—and particularly control the “big three” expenses Another shocker, I know. Closely related to “Track your spending” above is then actually spending less than you earn. And the biggest categories of expenses are typically housing, transportation, and food. The rent/mortgage, car payment, and monthly food and dining budget make up nearly two-thirds of the average American household spending. While you may not have direct control over these today, you absolutely have control over these items over the next 12 months. Start with your food budget. Figure out a way to eat healthy and delicious meals, prepared personally, from grocery stores. Figure out a way to manage your eating out expense, so that you are in control. Related: The 5 Financial Decisions That Make or Break Middle-Class Americans Don’t buy more car than you need. I drive a 2014 Toyota Corolla, paid off. If I wanted a safer car, or a family vehicle, I might buy a 2010-2015 SUV model, used and well maintained, after much research. But honestly, my Corolla is safe, reliable, and has plenty of gadgets. I don’t understand why non-millionaires are driving financed newer luxury vehicles. It’s asking for trouble when a recession comes. And that’s if you drive. I am getting my bike tuned up and plan to use that as a major mode of transportation this summer—it’s healthier, faster, and cleaner for the environment, in addition to being free. I admit—I should have been biking all along, but I got a little out of shape in this area in the last year or two. When your lease is up or you think about your next move, buy or rent a place that is well within your budget. Other websites and “experts” recommend that you spend no more than 30 percent of your income on rent/mortgage. Let me be clear—this is ridiculous, stupid advice. There is no rule of thumb. Spend as small a fraction of your income on housing as you reasonably can. I live in a somewhat dumpy half-duplex and have for the past seven years. 3. Bad debt is an emergency! Eliminate it at all costs! High-interest credit card debt, delinquent bills, unpaid parking tickets, debt with interest over 7 to 8 percent. These items are emergencies! You do not eat out when you have bad debt. You do not purchase alcohol. You do not go on trips. When you have bad debt, you need to aggressively, all-out attack it. Bad debt implies a lack of liquidity, a lack of cash or savings. When the next bad things happen, you are screwed. You can’t afford to fix the brakes, the windshield. You can’t afford to miss a day of work and visit a sick relative. 4. Build one year of financial runway Tracking your spending, consciously controlling your big three expenses, and removing or avoiding bad debts results in an almost magical outcome. Without any changes to your overall health, happiness, or leisure activities, you begin generating a major surplus of cold hard cash in your bank account, each and every month. “Financial runway” is the amount of time you can maintain your lifestyle without the need for a paycheck. It is critical to lengthen this runway if you hope to retire early, and it dramatically reduces your stress level when thinking about a recessionary economic environment. Imagine that you currently earn $75,000 per year after tax and spend $63,000 of that. This means that you save $1,000 per month, or $12,000 per year. It will take you a little over five years to accumulate the $63,000 you need to annually support your lifestyle. After you take my advice from earlier in this article, you will find it quite easy to reduce your spending to $37,500 per year—or much less. In the case of $37,500 in annual expenses, that translates to a little over $3,000 per month to maintain your lifestyle. In other words, fight hard to save 50 percent, or more, of your after-tax take home pay. At that rate, you will accumulate a year of runway in just 12 months. Spending less both increases the rate at which you accumulate cash and decreases the amount of cash you need to cover one year of spending. This runway will directly and immediately impact your stress level, your freedom of choice, your opportunity to make investments. It is critical to moving toward early retirement… and critical to successfully navigating a recession. 5. Invest for the long-term from a position of financial strength Here in March 2020, the markets have plunged over 25 percent in a matter of weeks. But even if they plunge further, and even if I get laid off, I still have a YEAR of runway, sitting there, ready to be deployed. Instead of being overwhelmed, the current market situation is an expected, natural part of the cycle that I and every other person pursuing financial freedom has naturally been preparing for. That reserve is insurance against a lost job. It’s an opportunity to purchase even more shares of the market at a low point. It’s insurance—I will NEVER have to sell off my investment portfolio in order to maintain my lifestyle! Because of that insurance, I can continue my philosophy of investing—the only philosophy of investing that I believe truly makes sense for the vast majority of the population—to invest for the very, very long-term, in appreciating, cashflowing assets and to do so regularly and consistently for the duration of my career and into retirement! Related: Are You Still Picking Stocks? You Are Ridiculous. Here’s Why. When I buy real estate, I purchase only when I have the down payment, plus closing costs, plus expected repairs, plus $10,000 to $15,000 in cash for my reserve. I add at least five figures to this reserve with every additional purchase. I do not touch this reserve, except to pay for maintenance and CapEx. I do not take cash flow from my business unless this reserve is above the threshold I have set—currently $35,000. I should never have to put money into my real estate business. I should never be forced to sell by market conditions. Because I will never have to sell, I can run and capitalize my business optimally for long-term performance, retaining the option to sell, refinance, or hold, when I review my portfolio annually. Because of my personal financial runway, I will never be forced to sell stocks to maintain my lifestyle or other businesses. I can keep my money invested. I will never spend the principal—I will never spend the original investment. Conclusion You know the formula for good personal finance—just like you know that you need to eat right, sleep, exercise, and maintain your hygiene to avoid developing chronic illness. If you’ve been a part of the FIRE movement, then you know that you need to stay the course, maintain your long-term investment plan, keep working hard at your job, and stay in control of your spending. You know that there is no reason to panic or rush to sell. You just keep up your long-term outlook as you’ve always done. You’ve naturally, through good habits, prepared for exactly these circumstances. If this is you, then we are here to help you. Feel free to join us on the BiggerPockets Money Podcast as we too navigate through the economy of 2020. Please feel free to join us on the other podcasts, as investors continue to make the most of the situation and build wealth. Please feel free to ask questions in the comments below or privately message me. I’ll personally respond to every one. If you are new to this platform, or are “out of shape” financially, and we do hit a recession here, then you may be in for a grind. We are here to help you, too. All are welcome to ping me personally with questions, to leave a comment, or to listen to us on the BiggerPockets Money Podcast. Whether it’s reassurance, knowledge, or a kick in the pants and some tough love, we’ll do what we can. BiggerPockets’ mission is to help as many people as possible build wealth through real estate. Our team and I have and will continue to preach, preach, preach the importance of building a rock-solid financial foundation, with reserves, where we spend less than we earn. It’s why I love being a part of the BiggerPockets Money Podcast and our community as a whole. As part of that mission, we will help you navigate 2020, and I will personally make myself available to anyone who needs help. If you are in great shape, then that’s fantastic! You will be able to continue carrying out your strategy or adapt to any changes in the landscape. You may even find outsize opportunity in the coming months. A good friend of mine likes to say, “never let a good crisis go to waste.” If you are caught off-guard, or aren’t in control of your finances, then that’s fine, too. We will help you to take control of your spending, tackle bad debts, build an emergency reserve, then build a runway, then begin investing. And if you are one of those people who still think this whole thing is overblown, then who knows, maybe we bounce right back as an economy. Feel free to make fun of me in the comments if that turns out to be the case. We are here to help every single one of you who wants help to get in control of your finances. No, it may not be easy. Yes, it requires discipline and commitment. But this is what we prepare for as investors. This is the world we live in. As a community, let’s get in shape or stay in shape financially and continue building toward our dreams of early retirement and the world-changing contributions we will make for society thereafter. What’s your investing plan in the coming months? Will you adjust your strategy or stay the course? Join the discussion in the comment section below.