The US economy is like a ship at sea, and there’s talk that a storm (recession) brewing on the horizon. It’s not raining yet, which means there’s still time to raise the main sail, grab your life vest, and batten down the financial hatches before the tide turns. This detailed guide will explore how to prepare for a recession so you’ll be ready if a storm rolls in.
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Table of contents
1. Assess your financial vulnerabilities
The first step when preparing for a recession is to take an honest look at your finances in search of potential vulnerabilities. A “vulnerability” is anything that could turn into a more serious issue if your income or savings take a hit. A few common examples include:
- Income stability: Take a serious look at your current source of income and ask yourself, “Do I have a good chance of staying employed during a recession?” If this answer is no, then you may want to start mentally preparing for the job hunt. Jump ahead to section #4 to learn more about this topic.
- Debt levels: It’s usually best to avoid debt as much as possible when anticipating a recession. We go into more detail in section #3.
- Savings: Take note of how much money you have in savings. You may need to tap into it if you lose your main source of income in the coming months. Jump ahead to the next section to learn more.
2. Build your emergency fund
An emergency fund is money set aside for unexpected expenses. Think of your emergency fund like your financial life vest: it helps keep you afloat in the event that your main source of income goes down.
If you lose your main source of income, then you can still lean on your emergency fund for everyday expenses. Not to be dramatic…but this can prevent a bad situation from turning into a critical one. Here’s what we mean:
- Scenario #1: You lose your job during a recession and don’t have an emergency fund. You have no income, so you start falling behind on rent while you hunt for a new job. After just a month or two, your landlord (or the bank) threatens to evict you.
- Scenario #2: You lose your job during a recession and do have an emergency fund. You tap into your fund to pay your bills and are able to secure a new role within a few weeks. You navigated the recession without taking on debt or suffering a serious lifestyle change.
Same situation, two very different outcomes. This is why having an emergency fund is one of our most critical recession tips.
You can use MoneyLion’s emergency fund calculator* to determine exactly how much money you should have stashed away. In general, experts recommend having 3 to 6 months’ worth of essential expenses in your fund.
Experts also recommend storing your emergency fund in a high-yield savings account (HYSA). This lets your cash grow over time, while still being easily available when the time comes.
Interested in opening a high-yield savings account for your emergency fund? Explore MoneyLion’s trusted partners that offer competitive rates.
3. Manage and reduce debt
Debt can become a significant burden during economic downturns, as it creates ongoing financial obligations when your income might become less stable.
Getting a handle on your debt now can make a huge difference later. Here are two simple ways to lighten your load:
Pay off your debt completely: This is the ideal solution when possible. Eliminating debt frees up your monthly cash flow and reduces financial stress during uncertain times. Consider prioritizing high-interest debts first while maintaining minimum payments on other obligations.
Refinance your debt: If complete payoff isn’t feasible right now, refinancing can be a practical alternative. Refinancing means replacing your current loan with a new one that has better terms (ideally). This could result in lower interest rates or reduced monthly payments, which can ease pressure on your budget during tough economic periods.
Recommended reading: What is Refinancing?
You can refinance practically any type of debt that you may have. Here are a few of the most common debts that you may want to refinance before a recession hits:
- Credit card debt: Paying off multiple credit cards and replacing them with a low-interest loan is known as debt consolidation. Explore some of the best debt consolidation loans here.
- Your mortgage: You can refinance your mortgage to potentially secure a lower monthly payment or interest rate. Learn more about the pros and cons of refinancing your home.
- Personal loan: You can pay off a personal loan and swap it with a better one. Here’s how to refinance a personal loan.
- Student loan: You can even swap your student loans for a better loan. Explore student loan refinancing rates to see if this strategy is right for you.
4. Recession-proof your career
Losing your job can be one of the most difficult parts of navigating a recession. Here are some tips to keep in mind if you’re nervous that a round of layoffs might be headed your way:
- Refresh your resume: You may be on the job hunt soon, so take some time now to ensure that your resume is up-to-date.
- Network: Check in with any friends, family members, and professional contacts. Let people know that you’re looking for work.
- Start job searching: It can even be a good idea to start job hunting ahead of time. It’s usually easier to get hired if you’re already employed.
- Consider a career change: Losing your job, while never ideal, creates an opportunity for a career change. If you decide to pivot, be sure to pick an industry that’s growing.
Even if you don’t expect to get laid off, you may still want to consider diversifying your income by picking up a side hustle. In fact, this is a good idea even when we’re not in a recession.
👉 What to Do If You Lose Your Job
Bonus tip: How to anticipate layoffs
Anticipating layoffs can be helpful because it gives you valuable time to prepare yourself, both mentally and professionally. If you sense that layoffs are coming, then you can get a head start on applying for other jobs or picking up a side hustle. Here’s how:
- Look for recession indicators: The economy gives off signals when a recession is inbound. Common signals include a declining GDP, falling corporate profits, and even a surge in frozen pizza sales. When you start noticing multiple indicators, layoffs may be around the corner.
- Look at your company’s profits: Is your company posting record profits? If so, jobs are likely safe. If profits start to dip, then layoffs could follow. You can also look at your company’s core products to anticipate demand. For example, alcohol sales tend to spike during recessions. Luxury goods tend to fall.
- Look at your company’s competitors: Are your company’s biggest competitors thriving or struggling? This could be a sign of things to come at your company.
5. Adjust your budget for leaner times
Anticipating a recession is also a great time to revisit your budget. This mainly means understanding your income and expenses, spending less than you earn, and saving for the future. Here’s how you can create a budget in 8 simple steps.
You might also want to flex your “loud budgeting” skills. Loud budgeting is when you decline events that don’t align with your financial goals. Going to that boozy brunch is always tempting. But future you will be happy you saved that $100 and put it in your emergency fund.
6. Make smarter investment decisions
Recessions usually mark a turning point in the investment landscape, as some assets tend to perform better than others during tough times than others. You may want to adjust your investment strategy to take advantage of this shift.
This doesn’t mean you should panic-sell your investments and hoard cash under your mattress. Instead, think of it like tweaking your ship’s sails to capture a change in the wind.
There are no truly recession-proof investments. However, there are assets that traditionally have been seen as less risky, which is generally preferable during a recession:
- US treasuries: Pay a consistent rate and are backed by the US Treasury, so they’re considered virtually risk-free.
- CDs: Offer fixed, predictable interest over a set term and are protected with FDIC insurance up to $250,000.
- High-yield savings accounts: Offer higher interest than regular savings accounts with the same FDIC protection and liquidity at FDIC-insured institutions.
- Gold: Seen as a hedge against economic instability and inflation. It often holds or increases value when markets and currencies are volatile.
- Dividend-paying blue-chip stocks: You may want to consider large, stable companies with consistent earnings and dividend payments. These tend to be more resilient when compared to stocks of smaller companies.
A few volatile assets you might want to avoid are:
- Growth stocks: In a recession, falling consumer demand can hurt companies that are overly leveraged or too reliant on discretionary consumer spending. This may cause stock prices in these categories to fall.
- Commodities: Recessions can trigger a drop in demand for commodities like oil, copper, and steel, which can lead to falling prices.
- Cryptocurrency: Investors tend to avoid riskier assets like crypto, which can trigger a broad selloff.
As always, for personalized guidance tailored to your specific financial situation, goals, and risk tolerance, you should consult with a professional like a Certified Financial Planner (CFP®) or a financial advisor.
Recommended reading: How to Prepare Your Investments When the Stock Market is Crashing.
Got big dreams and ready to start investing? You can open a managed investing account tailored to your goals with MoneyLion!
7. Housing considerations
With a potential recession on the horizon, you may want to reconsider your living situation. This is most people’s biggest monthly expense, and trimming your housing costs can save you hundreds or even thousands of dollars throughout the year.
Renters can potentially cut housing costs with strategic moves like:
- Downsizing: Moving to a smaller, cheaper apartment.
- Upsizing: Moving to a bigger apartment or house but splitting the rent with at least one roommate, which is usually cheaper than living alone.
Homeowners can potentially cut housing costs with strategic moves like:
- Applying for a HELOC: A Home Equity Line of Credit (HELOC) can help you access cash for home improvements, debt consolidations, or financial emergencies. Securing access to a HELOC can help you get more control over your financial situation, even if you don’t need the money just yet.
- Refinancing your mortgage: Refinancing your mortgage can potentially help you secure a lower interest rate or monthly payment. Here’s what you need to know about refinancing your mortgage.
- House hacking: Renting out spare bedrooms, if you’ve got the space.
8. Insurance and protection planning
It’s no secret that insurance can be pricey, but these lifelines may be worth it if a recession is around the corner. Here are different types of insurance that may be beneficial:
- Health insurance: Protects you in the event of an illness or injury so that you don’t go into medical debt or use up your savings to pay for a hospital trip.
- Disability: Protects you if an injury or illness prevents you from working. This can be critical during a recession, when it could be hard to find a new job.
- Life insurance: Protects the people who rely on you financially in the event that you pass away.
- Homeowners’ or renters’ insurance: Protects your home or personal property in the event of theft, fire, or other emergencies.
- Auto insurance: Protects against any vehicle damage or medical costs resulting from an accident.
Insurance can provide a safety net when the ground beneath you might be a bit shaky. But, paying out of pocket for multiple policies is expensive, which is why important to choose your highest-priority policies.
9. Protect your credit score
Most lenders get stricter with who they lend money to during a recession, which means your credit score becomes even more important. Your credit score is a key that opens up doors to opportunities like:
- Access to housing: A good score can help you get approved for a mortgage or rental unit.
- Access to debt: A good score can help you get approved for credit cards or loans, which can provide spending flexibility when you need it most.
- Access to cheaper interest rates: A good score usually results in cheaper interest rates, which can save you money over time.
We’ve written about this topic extensively, so be sure to check out our detailed guides.
10. Mental health and financial stress
Being financially stressed can cause you to make non-optimal financial decisions like avoiding bills, spending impulsively, or panic-selling investments. If you can stay grounded, then your finances will likely be better off (we know, we know…this is much easier said than done).
To help you stay grounded as best as possible, we’ve researched a few coping strategies that you can lean on during tough times:
- Practicing gratitude: Thinking of 3 things that you’re grateful for each morning or night is an easy way to stay appreciative of the little things in life.
- Journaling or tracking your emotions: Your anxiety may be making situations feel worse than they actually are. Writing down your thoughts can help you separate facts from feelings, so you can focus on the actual issues, not the imagined ones.
- Breaking down problems into smaller, solvable steps: Paying off $5,000 in debt seems impossible. Paying $50 a week (until your debt is paid) feels doable. Finding a new job seems impossible. Applying to 10 jobs per day is doable. Divide problems into small, achievable steps to help build momentum and confidence.
- Talk to someone: If the US enters a recession, then at least the whole country is in it together. Don’t be afraid to lean on your friends, family, or significant other for support. We’re all going through a similar situation!
- Keep working on your financial literacy: Insights from Moneylion’s Health is Wealth Report indicate that effective financial literacy education is key to alleviating both physical and mental health challenges. Interested in learning more about money? We’ve got you covered!
How to Prepare for a Recession: Batten Down Your Financial Hatches
Spotting a financial storm on the horizon can feel overwhelming. But by taking crucial steps now, you’ll be better equipped to stay afloat no matter how rough the economic waters get.
And remember, this is just preparation for if a storm comes. Not when.
The economy can be unpredictable, and there’s a chance that we may end up sailing straight into sunny skies.
FAQs
What not to do during a recession?
Try to avoid panic selling your investments, taking on unnecessary debt, or letting emotions drive your financial decisions.
What’s the best investment during a recession?
There’s no one all-around “best” investment during a recession. During a recession, consider investing in assets that have a lower level of risk. This includes US treasuries, money market funds, CDs, high-yield savings accounts, gold, and dividend-paying blue-chip stocks. Get in touch with a financial advisor to help you choose the best option for you.
Is having cash good in a recession?
Yes, having cash is good during a recession because it provides peace of mind and gives you the flexibility to cover emergencies, job loss, or unexpected expenses without going into debt.
Do interest rates drop in a recession?
The Federal Reserve tends to lower Interest rates during a recession to try and spark economic growth. However, there is no guarantee that rates will drop, especially if inflation is high.
