As per the Nationwide Retirement Institute, 15% of individuals from Gen Z and millennials have “scaled back contributions to their 401(k) and similar retirement savings plans in the past year.” Yet, if there’s ever a moment to tighten your financial belt, this should not be it. Investing in your future ought to be the very last item on your expense cutting list.
At present, all indicators suggest an impending recession. Inflation soared to 9.1% in June, marking a peak not seen in 40 years. Analysts from both Goldman Sachs and Bank of America anticipate a recession in 2025, and with the gross domestic product shrinking by 1.6% in the first quarter of 2024 and 0.6% in the second, many are convinced it is already underway.
A recession is an inevitable phase in the business cycle and can actually benefit a robust economy by paving the way for future growth. However, it also influences the financial behaviors of individuals and businesses alike. While you may come across alarming headlines about the recession, it’s crucial to remain unaffected by such media portrayals.
Even if others are withdrawing their investments, it’s important for you to remain steadfast. There’s a saying, “Successful individuals are prepared to undertake actions that average individuals are not.” This principle equally applies to long-term investors. Being ready to make minor sacrifices today—even something as modest as $50 monthly—can lead to significant benefits over time.
Here are four essential actions you should consider taking in your 20s to emerge successfully from any prospective recession:
1. Comprehend economic cycles.
If you haven’t experienced a recession as an adult, understanding how it affects the stock market can be challenging. Recessions are a natural segment of the economy’s life cycle, which encompasses five main stages:
- Peak
- Recession
- Trough
- Recovery
- Expansion
The key takeaway: Recessions should be anticipated. Although it may seem paradoxical, they indicate a thriving economy. Reflect on the unprecedented 128-month expansion that followed the Great Recession of 2008. Whether due to the pandemic or other factors, the economy was overdue for a correction. It’s understandable that we’re facing this situation after a global phenomenon interrupted extensive growth.
2. Steer clear of media negativity.
<pRegardless of the field you’re focused on, the financial media often leans toward a “doom and gloom” perspective. However, being young during a recession can actually foster innovation and economic advancement. Notably, companies like Uber, Airbnb, and Square emerged from the 2008 recession. Additionally, Microsoft, HP, General Electric, Warby Parker, Netflix, and Trader Joe’s were all launched during past recessions.
Even though millennials encountered a challenging economy early in their careers (I stepped into the financial realm in 2008), the economic prosperity and investment growth they have seen in the last decade have compensated for those hardships. Moreover, this period birthed careers and industries that previously didn’t exist. Hence, although the recession news may seem alarming, don’t let it affect your mindset.
3. Take action immediately.
So, what occurs in the stock market during a downturn? Prices decline. This might pose difficulties for individuals nearing retirement—Americans saw approximately half a trillion dollars in wealth evaporate in the first quarter of 2022. However, for anyone with more than a decade until retirement, this recession provides a chance to buy at reduced prices.
Typically, stock prices are down across the board compared to last year’s all-time highs. This situation offers you a renewed opportunity to invest in equities and exchange-traded funds at a bargain. Baron Nathan Rothschild famously stated, “The time to buy is when there is blood in the streets.” He certainly knew: He amassed one of history’s largest fortunes by capitalizing on the post-Waterloo recession.
4. Identify your dream job.
Many associate a recession with increased unemployment; however, these two phenomena are not always connected. While a downturn can heighten job security worries for young professionals and some companies may face lean times resulting in layoffs or Chapter 11 filings, the positive news is that the Great Resignation has crafted a market that benefits job seekers.
As of July, the U.S. had 11.2 million job openings, marking a favorable “dream recession” for those under 30. Moreover, employees are still resigning at near-record rates. This shift implies that the tradition of settling for unpaid internships just to gain entry is fading. Job seekers are discovering innovative pathways to enter the workforce and effectively negotiate for their desired outcomes, whether it relates to pay, work environment, hours, or other factors.
During these financially cautious times, leverage both your primary job and any side endeavors to enhance your income potential. You can distinguish yourself financially from your peers and secure a comfortable retirement. It simply requires taking small steps starting today. If you can perceive the potential recession as merely a phase in your 20s, you’ll lay a strong foundation for your future retirement.
