In times of economic uncertainty, understanding how to prepare for a recession can provide a sense of stability and control over your financial future. A recession, characterized by a decline in economic activity, can impact jobs, investments, and overall financial well-being. By taking proactive steps, such as reviewing your budget, building an emergency fund, and managing debt wisely, you can better position yourself to weather economic downturns. It’s also beneficial to reassess your investment strategy, ensuring it aligns with long-term goals while considering potential market fluctuations.
Creating a financial plan to follow during a recession is extremely important. Speak with a financial advisor about it today.
Build an Emergency Savings Fund for You and Your Family
Establishing an emergency fund is a foundational first step to take if you’re wondering how to prepare for a recession.
Ideally, you’ve got an emergency fund. Financial experts commonly recommend giving yourself a runway of about three months. That is, you should have enough on hand to cover three months’ worth of expenses should you lose your job. But during this uncertain time, you’ll want to have more available. So if you have three months’ of expenses, you’ll want at least to double that amount. During the Great Recession, it took people six months or longer to find jobs.
If you have the additional money stowed away in something liquid like a certificate of deposit, it’s fine where it is. But if it’s in something less liquid, you may want to move it to, say, a high-yield savings account. Of course, with the market down, you’ll want to tread carefully before officially selling any investments. But if you’ve already taken some profits off the table, you may want to set aside part of them for your emergency fund.
If you don’t have additional savings – or any savings, now is a good time to start your emergency fund. Of course, this is at once the easiest and hardest piece of advice when it comes to recession-proofing your finances. Easy, because it takes no special insight to know that having more money will make life less difficult during troubled times. Hard, because you can’t save money you don’t have.
Rework Your Monthly Budget
Perhaps the most tedious single exercise in personal finance is a monthly budget, which is why most households don’t keep one.
That isn’t to say that most people don’t know what they’re spending. From that perspective, the average consumer absolutely budgets. Most households keep a general monthly sense of how much goes in and goes out. They get sloppy, however, around the details.
You’ll want to go through your finances with a fine tooth comb. Look through things like your monthly subscriptions to identify products or services that you hardly use anymore. The same goes for memberships to the gym or other clubs.
A detailed monthly budget is good financial housekeeping for any period, but in a recession it can be absolutely critical. It will let you know where you can find some money every month, and the areas that might let you cut back.
The truth is, if you’re like most people, you spend more every month than you realize. That’s good news. It means there’s some money to find.
Create a Plan for Managing Your Debt and Loans
Managing debt during a recession requires a clear strategy that balances repayment with maintaining liquidity. Start by listing all your debts, including interest rates, monthly payments, and balances. Focus on prioritizing high-interest debt, such as credit cards, as these can quickly spiral out of control if left unchecked. However, avoid overextending your finances by paying off too much at once – retaining some cash reserves for emergencies is equally important.
If you’re facing financial strain, consider exploring options to reduce your debt burden. Many lenders offer hardship programs, which may temporarily lower your interest rates or allow for payment deferrals. For federally-backed loans, such as student loans, there are often more flexible repayment options available during economic downturns, including temporary forbearance or income-based plans.
Consolidating debt into a single lower-interest loan can also simplify repayment and reduce monthly costs. This approach works well if you have good credit and can secure a favorable rate. Alternatively, refinancing existing loans may be an option to reduce overall interest payments.
The next step is deciding what to do with your debt. Look at options for restructuring to lower cost accounts, or consolidating your debt to a more manageable form. Ideally, you want to pay off your high interest debt to make sure that it isn’t hanging around your neck if you lose your job. But don’t simply throw money at the credit card. You’ll also need your cash reserves going into a recession, so strike a balance between paying off your loans and keeping some money on hand for emergencies.
Review and Reevaluate Your Investments
It’s not necessary to stop investing during a recession, but it should be done with extra caution. Make sure that your asset allocation has a large cash portion if you’ll be needing to tap your portfolio. You may also want to develop passive streams of income now. Peer-to-peer lending and real estate investment trusts (REITs) are two traditional ways to create an income stream. Or maybe you want to look into a fixed or fixed indexed annuity.
If you have spare money to invest for the long term, consider core sector stocks and dividend stocks. On the other hand, avoid volatile sectors like energy, oil service, commodities and financial shares. Stocks of consumer discretionary companies, those that offer non-essential items such as apparel, luxury goods and consumer services, are also prone to volatility during a recession.
Most importantly, don’t try to time the market. It may be tempting to buy the dip and reap returns, or sell off your equities and wait for a return to normalcy. But the former risks greater losses and the latter risks missing out on the recovery. You’re better off sticking with your existing long-term investing plan.
Strengthen Job and Career Prospects
Job security becomes a concern for many during recessions, making it a good time to invest in skills or certifications that improve employability. Networking within your industry and staying updated on job market trends can also be helpful. Proactive measures in career development can provide additional layers of security.
Looking for a new job doesn’t have to mean actively sending out cover letters. Finding a job is a process that involves networking, reconnecting with old contacts and trying to find opportunities. It means paying attention to your skills and figuring out what might make your resume more impressive. It means looking seriously for growing job markets and new places you could take your career.
All of this takes time, and the worst moment to start is after you’ve been laid off. Instead, start now. If your job is safe, you’ll have touched base with old friends, updated your résumé and gotten a clearer picture of career possibilities.
Bottom Line
Economic downturns present challenges that require thoughtful planning and resourcefulness. By focusing on practical steps, such as boosting savings, reevaluating spending habits and managing debt wisely, individuals can build a financial buffer to withstand uncertainty. Preparing for potential job market shifts and carefully assessing investments can further contribute to long-term stability. While no one can predict the exact trajectory of a recession, taking proactive measures can help create a sense of readiness and adaptability for whatever comes next.
Tips for Weathering a Recession
- If you’re nervous about a recession, consider enlisting the help of a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- It’s important to distinguish between a market correction, a recession and a depression. But regardless of the economic cycle, review your budget to identify areas where you can reduce discretionary expenses. Eliminating unnecessary costs can free up funds for essentials or savings during uncertain times.
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