Author Topic: Preparing for a recession and buying a home  (Read 2829 times)

shariden

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Preparing for a recession and buying a home
« on: June 24, 2017, 07:55:14 AM »
After just reading MMM's recent post about a looming recession, I was forced to reconsider my FI/RE strategy.  Presently, my life situation is:

Age 28, engaged, no debt, low income ($20k/year but working toward an A.A.S. in web development), 6 months of living expenses in short-term savings, no debts, low bills (total monthly expenses are about $380 - $400).  I have $16k in a Roth 401k (all eggs in the S&P 500 basket since the fees for all other stocks in our retirement plan are close to 1%... yikes) and $5k in a Roth IRA (Vanguard target date index fund, VFFVX).  I aim to retire at 40 - 45.  Should I...

1) start throwing most of my money at my investments (very cautious to do this if a recession is on the horizon... wouldn't it make more sense to wait it out and throw a big ball of money into my investments when the market tanks and stocks go on sale?)

2) start putting most of my savings away for a house... Right now we are renting, and I've never owned a home before. I am terrified of debt and would LOVE to only have to finance half (or less) of a mortgage.  I live in a pretty wealthy city.. would it make sense to wait for a recession to buy a home, due to lower interest rates and more foreclosures on the market?

3) a combination of 1 and 2

Mr. Green

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Re: Preparing for a recession and buying a home
« Reply #1 on: June 24, 2017, 06:08:52 PM »
Despite the post by MMM, which is true in a general sense, we never know when the next market correction will occur. Some folks have been saying a recession is imminent for two years now. Others claimed it would come after Trump was elected. Those were bad predictions. Others say this bull market could run for another 5 years. It's impossible to know how it will play out and trying to predict it is just market timing. You could throw your money in a bank account, see a recession, and look like a genius, or you could miss out on 20% of gains and feel really foolish. I would make a plan for investing in general, regardless of what could be looking, and just stick to it. That's the only way to keep emotions from driving your investing decisions, and emotional decisions can really come back to haunt you.

retiringearly

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Re: Preparing for a recession and buying a home
« Reply #2 on: June 25, 2017, 03:42:01 PM »
Despite the post by MMM, which is true in a general sense, we never know when the next market correction will occur. Some folks have been saying a recession is imminent for two years now. Others claimed it would come after Trump was elected. Those were bad predictions. Others say this bull market could run for another 5 years. It's impossible to know how it will play out and trying to predict it is just market timing. You could throw your money in a bank account, see a recession, and look like a genius, or you could miss out on 20% of gains and feel really foolish. I would make a plan for investing in general, regardless of what could be looking, and just stick to it. That's the only way to keep emotions from driving your investing decisions, and emotional decisions can really come back to haunt you.
Agreed.
If you wait for the "perfect" time to invest you will most likely never invest.

Guide2003

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Re: Preparing for a recession and buying a home
« Reply #3 on: June 25, 2017, 04:03:57 PM »
I would think that in your current situation you'd want to prioritize investing over saving for a house. Is your rent included in that $400/month?!? If so i'd imagine that your bills will go up a little for a bigger place once you get married.

Another way to think about it is that you know you're going to have to pay for a retirement, but its possible to never have to pay for a house. Well, I guess its possible to never retire, but none of us want to think that way! Might as well start saving for retirement now and wait to start house plans until you're sure a house is the smartest option.

economist

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Re: Preparing for a recession and buying a home
« Reply #4 on: June 26, 2017, 02:22:20 PM »
We're close in ages (I'm 26) so I'll share how I think about it.

The amount of money I currently have invested in the market is tiny compared to what I expect to have invested in the future. So, how the market performs today is much less important to me than how it performs 5, 10, or 20 years from now. Therefore it makes sense for me to go for the highest expected return (equities) without worrying as much about the risk of losing money.

Another way of putting it: I probably have less than 10% of my expected lifetime savings invested in the market right now. 90+% of my net worth is in my future income and investment returns. So I am over-invested in the future. Anything I invest in the market today actually lowers my risk, because I have less of my wealth concentrated in the future performance of the market and more of it concentrated in the present.

AZDude

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Re: Preparing for a recession and buying a home
« Reply #5 on: June 27, 2017, 03:39:16 PM »
If it is a ROTH 401(k) and ROTH IRA, then put your money there. You can withdraw at any time the contributions you make, so save for your house in those accounts, and if you never end up buying, no worries.

17 years is more than enough time to weather a recession, anyway. Chances are you will at least one and probably two recessions before you retire. Also, recession can vary quite a bit. Most last only a few months before expansion starts again. Pretty much a zero probability of another crash like in 2009, at least for another 30+ years.

2Cent

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Re: Preparing for a recession and buying a home
« Reply #6 on: June 29, 2017, 03:34:21 AM »
Also, recession can vary quite a bit. Most last only a few months before expansion starts again. Pretty much a zero probability of another crash like in 2009, at least for another 30+ years.
I wouldn't say that. It impacts different lines of work differently. Some markets are so inflated that they never recover.
Currently the recession is being staved off by governments pumping in trilions of dollars/euros/yens etc. So the next recession is just as soon as someone decides it's enough. Until then that money will go into different markets, inflating bubbles and setting us up for an ever larger collapse. So while it may not be the same as in 2008/9 it may be just as big.

For buying a house now I would say forget it until you have kids. Until then you are flexible to live cheap and to move without much consequence, so use it. After having kids your needs will change a lot, so better wait and see what they are. I've seen a few of my friends buy a house after marriage thinking they will live there forever only to find out that the there school sucks and it is too small with 2 kids.

Laura33

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Re: Preparing for a recession and buying a home
« Reply #7 on: June 29, 2017, 06:17:32 AM »
I posted this on the duplicate thread originally, so since this is the one that has taken off, I figured I'd re-post it here.

4) None of the above.  The biggest risk from a recession is the loss of a significant number of jobs.  What is your plan if your job goes away, and there are 200 people lined up for every opening?  What about if you keep your job, but your SO loses theirs -- can you make it indefinitely on one salary?  What if both go away?  Would you move for a new job, or would you hunker down until something came through -- and are your finances prepared for either option?

The best thing you can plan to do to weather a few down years is keep your expenses low, your EF solid, and your employable skills up to date and flexible.  Do not lock yourself into a house -- what are you going to do if all of the local job opportunities go away and the mortgage is like an albatross around your neck?  DO not tie up short-term money in the market -- what if you need that $10k because the jobs go away right when the market crashes? 

OTOH, you also don't want to overreact and go to all-cash -- if you do that, what happens if the recession doesn't hit for another 5 years and you miss years of market gains?  MMM is brilliant at what he does, but he still can't predict the future.

IOW, don't run around and drive yourself nuts trying to develop precisely the right approach for whatever you think is going to happen, because you never know what is going to hit or how bad it will be.  Stay the course, keep funding your current investments, and if you have any extra, maybe increase your EF.  Invest your time and effort into making yourself as employable and desirable as possible. And then if the recession hits and your company is in good shape and your job is solid, you can decide at that point whether you want to use some of that free cash to buy a house or buy more stocks.

Schaefer Light

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Re: Preparing for a recession and buying a home
« Reply #8 on: June 29, 2017, 08:36:05 AM »

4) None of the above.  The biggest risk from a recession is the loss of a significant number of jobs.  What is your plan if your job goes away, and there are 200 people lined up for every opening?  What about if you keep your job, but your SO loses theirs -- can you make it indefinitely on one salary?  What if both go away?  Would you move for a new job, or would you hunker down until something came through -- and are your finances prepared for either option?

Good post.  The absolute worst case scenario is you get divorced, have to split half of the wealth you accumulate during your marriage, owe your spouse a large monthly alimony payment, and then you lose your job.  It can't get much worse than that.