How to recession-proof your income

We all have passed through one or more recessions in our lives. Those economic declines may or may not have affected us directly. But we can read so many stories of income losses. Behind each of those stories, we can see the dreams and aspirations of so many individuals, years of hard work, lifestyles for whole families, all going down the drain. How do we safeguard our income streams against any future recessions?

Recessions are defined as 6 months of economic decline(measured in the country’s gross domestic product – GDP). It is normally announced after the fact.

In an earlier post, we looked at ways to build multiple streams of income. Now we will look at how we can safeguard our income streams against the effects of any economic declines.

Please note that the ideas described in this article may not be suitable for everybody’s situation. So please do your due diligence before employing any of the ideas mentioned in this article.

We may be working in a 9-to-5 job or working as independents with our streams of income. We will look at different steps that we can take for both active and passive income streams which can help us during recessions.

As we have seen, economic downturns can be country-wide, state-wide, or localized to a region. Sometimes, it is industry-specific also. Over the years, the US has undergone about 50 recessions lasting from 6 months to 6 years.

During recessions or economic downturns, funds dry up quickly. People and private companies tighten their belts. Capital investment budgets get reduced, discretionary spending or non-essential expenses gets reduced, contracts get canceled without any grace period or prior notice. Companies perform sudden layoffs.

But there is an opportunity for income or growth presenting somewhere all the time.

1. Active Income Streams:

In an earlier article, we looked at the following groups of active income streams,

Providing Business Services
Providing Skilled Trades or Non-Business Services
Selling Consumer or Digital Products

Not all income streams work in a similar pattern. But few common themes could protect and grow our income streams during economic downturns.

a. Follow the money:

When the economy shrinks, our products or services may not get sold like normal times. Our 9-to-5 job may be at the risk of elimination. One of the best ways to protect our income streams is having those who receive money during recessions as our customer base or the source of income.

For example,

Individuals or companies getting funding from the government (Federal and State)
Companies getting government contracts
Companies getting funding from venture capitalists
Individuals or companies servicing or selling products to wealthy clients

It is prudent to target the above customer base during non-recessionary times and develop it so that our income streams are not affected during downturns.

We can employ the SCAMPER technique to sell our products or services to them. Please see the earlier article – How to build multiple streams of income? for the use of the SCAMPER technique.

b. Not what you know or have, but who you know:

In good times, an email or a social media introduction may be sufficient to make a sale or start a business relationship, but not in downturns. We can expand on the two profound pieces of advice – Never eat alone and Dig your well before you are thirsty.

i.e. 1. Develop a network, 2. Develop it before we need it.

By being genuinely interested in the welfare of our current and potential customers, we can develop a good business relationship with them. It will go a long way in protecting our income from unforeseen downturns.

Because during downturns, the stampede in the narrow pathway towards money will be heavy. The competition will be overwhelming on job boards and freelancing platforms. So it is necessary to lay the foundation for ways out of the stampede ahead of time.

c. Offer more value:

We have to remember the universal law that there is no free lunch. If we look at the last Great Depression or in any of the past recessions, companies survived by employing different methods to add value to their products or services.

Some of them were,

Give discounts or offer something for free
Other value additions like, Reduction in Time/Complexity, Increase in Usability/Profit/Safety/Eco-friendliness, etc.

We have to employ similar methods to offer more value to our customers. The value addition is based on our products or services and it is something we have to decide for ourselves.

d. Focus on defensive streams:

In the investment world, few industries are marked as defensive Industries. These are the industries that people cannot live without, even during economic downturns. For example, Healthcare, Utilities, Consumer Staples, Discount Stores, etc.

Similarly, by focusing on defensive streams, we can safeguard our income during any recessions. Some of the ideas are,

Essential Products and Services: Even during any downturns, people do not stop spending on essential items and services. They may reduce the amount of spending, but do not stop completely. So if we have our income streams in any of these essential areas, it would sustain our income. Example: Healthcare, Utilities, Consumer Staples, Discount Stores, Staffing Companies, Debt Collection Companies, Baby Products, Food and Beverage, Retail Consignment, Health and Senior Services, Repair Services, Pawn Shops.

Local Economy Based: It may or may not be possible to sell our products and services to local customers only. But we need to be aware of the fact that during downturns, people and governments are protective of their local economic base. Governments institute various measures to sustain their revenue collection (in terms of taxes) and to keep the jobs locally. We can use this behavior to our advantage by focusing on local markets where ever possible.

Human Contact: During downturns, companies would try to cut costs by outsourcing their operations to overseas resources or a distant location. But any service that requires human contact cannot be outsourced easily. Also, jobs or services involving human contact usually allow us to develop mutual trust with our customers that goes a long way in sustaining business relationships.

2. Passive income streams:

Similar to active income streams, we can take some precautionary steps in passive income streams also.

a. Dividend Income:

Concerning dividend income, we can take the following measures to ensure the continuation of our dividends.

By investing in companies that have a long dividend increasing/paying history, we can minimize the disruption. For example, companies under the Dividend Kings list have continued increasing dividends for 50 consecutive years. Dividend Aristocrats have increased the dividends for 25 years. They have a much better chance of maintaining the dividend payments for the future.
Even within Dividend Kings and Dividend Aristocrats, we can take few conservative measures like low payout ratio, low debt ratio, Low P/E, or P/S ratios to increase our safety for dividends.

b. Rental Income:

Rental income is one of the popular passive income streams in the US. They got very popular over the last 2 decades due to low-interest rates and the growth of online property information. But due to the illiquid nature of rental investments, we should not treat the rental investments as short-term investments. It can not be considered as a recession-proof income stream as well. Similar to what happened during the Covid pandemic, governments can institute rent moratoriums or rent controls.

If we have to rely on rental streams, some of the following ideas may be helpful,

Let us avoid excess leverage completely. Let us always plan for an extended break in rental income before purchasing rental properties. We should have funds to pay for mortgages, property taxes, and any necessary fixes for the properties.
We all know that concerning real estate, the top 3 things are location, location, location. So selecting a location for our properties is the most important criteria of all. Let us review the defensive steps for active streams above. Does our rental property location have defensive industries to support the local rental market?
Normally, vacation rentals are the most affected during downturns due to the belt-tightening of customers. Commercial rentals are comparatively better. Residential rentals, especially multi-family homes are considered more secure.
We have to factor in the tenants’ ability to the continuation of the rental payments.
In the case of commercial rentals, businesses negotiate for longer lease agreements which may help protect the income stream for the owners of the properties.
Online platforms like Airbnb, Vrbo, Spacer, Vacasa may help to bring short-term or outside tenants. It is definitely worth watching out for new platforms and ongoing trends in this area.

c. Fixed Income Vehicles(Bonds/Money Market/CDs):

People usually flock to fixed income vehicles like Bonds, Money Market funds, or CDs during economic downturns. Not all fixed-income vehicles are the same. US treasury bonds are considered risk-free investments but offer close to zero interest rates. Other State and local government bonds usually track treasury bonds but possess more risk of not meeting their debt commitments.

We are living in unusual times with the interest rates at historic lows and relaxed standards in the ratings of non-government bonds. The low-interest-rate environment caused investors to chase yields and invest in high-risk high-yield securities. So future downturns may trigger another episode of the 2008 financial crisis(which got triggered by mortgage-based securities).

With the direction of interest rates unknown, it is prudent to invest only in short-term bonds funds or floating rate bonds and avoid high-yield corporate bonds.

d. Online Income Streams:

We may generate income from any of the following online streams,

Informational Products
Software tools/Apps
Digital Products (example, Pictures)
Online Courses
Affiliate Income (from Social Media Channels)
Online tutoring
Remote Freelancing
Dropshipping Store

These streams have a low maintenance overhead compared to brick-and-mortar ventures. So they have high sustaining potential.

Most of these income streams rely on various online platforms and social media channels. One thing that we need to be aware of is, these online platforms and social media channels can change their policies and procedures without any prior warning. Those changes can cause serious impacts on our income streams.

So we should always diversify our online income streams and also have an online presence independent of those platforms as well.

e. Private Lending:

We have many private Peer-to-Peer lending platforms coming up with different focuses. During downturns, money flow decreases, and the risk of capital loss increases. So if we sense a recession coming, it is prudent to curtail any private lending activities either through online platforms or through private ventures. At the same time, if we have gone through a recession and are about to come out of it, we may be able to select good businesses which can sustain economic downturns.

Final thoughts:

There is an interesting phenomenon concerning income or money. We should seek and secure when we are not in desperate situations.

Let us employ (after due diligence) various ideas discussed in this article to secure our income streams before any desperate situations. In addition to recession-proofing our income, leading a simple life would always help weather any economic storms.

Thank you for reading. Please share your thoughts below.