Here's Exactly How To Prepare for a Recession, According to Finance Experts
Top tips to recession-proof your finances and life.
In the early days of the pandemic, news tickers were full of mass layoffs as businesses shut down or went virtual. But in the years since, the economy seemed to bounce back. Now, however, log onto LinkedIn, and you'll see a steady stream of posts about layoffs (maybe you, unfortunately, wrote one too). Inflation has continued, and there's talk of a looming recession. Didn't we just do this?
And some of us still remember the Great Recession in 2008—something that took several years to climb out of. Is that what's in store for us again? Cue the doom scrolling.
That being said, experts have some tips on how to prepare for a recession.
"The word and concept of having a recession are very scary to people," says Kimberly Palmer, a personal finance expert with NerdWallet. "It calls a lot of things into question. People wonder if they are able to keep their jobs, pay their bills and credit cards."
The best time to fix the roof is before it starts leaking. Taking a few steps can help you recession-proof your lifestyle and finances.
"If economically, things do go in the wrong direction, but you took the time to put together a plan for this possibility, you will have a much easier situation getting through tough times than most people," says Stuart Boxenbaum, CFP and president of Statewide Financial Group in Florida.
Here's how to control what you can and double down on your financial security, so you're ready for a recession.
How To Prepare for a Recession, According to Finance Experts
Build an Emergency Fund
The best step you can take right now is to start putting money away just in case you or someone in your household gets laid off or inflation spikes monthly expenses.
"Make sure you have an emergency savings fund," Spencer says. "If you don’t, it’s the perfect time to build it because you want it before you need it."
This emergency fund can also prevent you from accumulating debt that will exacerbate and prolong the effects of a recession.
“You can turn to your emergency fund instead of your credit card in a crisis," Spencer says.
The standard advice is to build three to six months of expenses. Spencer knows that can feel daunting—especially in current times with inflation.
"Instead of thinking about it like that...aim for an amount that feels doable to you, even if it means taking small steps like putting away $20 per week or whatever you can manage?’" Spencer suggests. "Building up that small cushion can go a long way in getting you through a stressful time like a job loss."
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Pay Off Debt
With rates rising, it's becoming more expensive to have credit card debt. Now is the time to focus on nixing it.
"Paying off high-interest debt is such a good thing to prioritize since the rates are rising," Spencer says.
Spencer suggests using a debt payoff calculator (NerdWallet has one, and you can find others online for free). These tools allow you to plug in factors like your credit card interest rate and total outstanding debt. Play around with it.
“You can see, 'If I set this much aside each month to pay off my debt, this is how long it will take,'" explains Spencer.
Once you've settled on a number, Spencer says there are two ways to tackle debt. The first is to pay off high-interest debt first. "This minimizes the overall interest you are paying," Spencer says.
Alternatively, start by knocking off your smallest debts. "Some people find that very motivating," Spencer shares. "You want to pick the method that works best for you.”
Another key part of this step: "Don't spend money you don't have," Boxenbaum stresses.
Review Your Budget
A potential looming recession is a perfect excuse to re-evaluate your budget.
"It’s much more powerful to cut back before you actually need to instead of waiting for a true emergency," Spencer explains.
Time for a gut-check: Do you really need that Disney+ subscription when you're totally a Netflix family? Mentally, it may feel better to get rid of it before you find yourself grappling with a job loss.
Spencer also suggests shopping around for lower cell phone plans. You may also be able to re-evaluate your auto insurance if it's up for renewal and see if another company offers similar plans at lower rates.
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Should You Invest?
If Wall Street is maybe-possibly-probably going to implode, should you really be investing?
Choose something low-risk if you do. "Treasury bonds are a safe option, along with fixed short-term annuities—three-year holding—with interest rates close to 5%," Boxenbaum says. "There are no fees on most of these safe savings choices, and many of them have the option if you need to take income at a later date."
If you can or need to invest for a longer term, Boxenbaum suggests looking into bonus annuity choices that pay a cash bonus upfront.
"The most important thing with an annuity option is that your principal is always guaranteed and safe," he says.
If this all sounds like mumbo-jumbo, speak with a financial advisor who can help you find the best option for your current situation—and the economy.
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This Sounds Great—but I Already Got Laid Off
Thousands of people, particularly in the tech and media sectors, have been laid off since the end of 2022. Even tech titans like Google and Facebook, once seemingly unflappable forces, reduced their workforces by tens of thousands.
What can you do if the proverbial roof is already leaking?
"There’s not an easy answer or something that will make you feel [good] right away," Spencer says. "I want to acknowledge that... it’s really tough."
Take a hard look at your budget—particularly if emergency funds are limited or nonexistent.
"Once you or a partner has lost a job, that’s when you need to dial back spending where you are cutting things, even if you still value them," Spencer says. "Maybe you enjoy certain streaming services, but you can dial back."
Remember: It doesn't have to be forever. Right now, hone in on nice-to-haves, including line items in your budget that you'll need to land your next job. Consider those an investment in you and your future.
"You want to focus on essentials like food, housing and transportation," Spencer says. "For example, you may need a car to apply for jobs or get your next job."
Finally, help is available, and there's no shame in getting it. Spencer says 211.org can link you to resources in your area that help you find food, afford bills and work on your mental health.
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Prepare for a Layoff
It sounds scary and ominous, but no job is guaranteed. Though this mindset isn't a fun one—and shouldn't dominate your life—having a plan in place for a layoff can help you pivot from work life to job hunt more quickly.
"It is so important to always be ready. It can happen to anyone at any time," Spencer explains. "No one is immune from job layoffs."
Spencer suggests ensuring your resume is up to date and that you have copies of files pertaining to any projects you worked on. Often, employers cut off access to servers immediately after a departure meeting.
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Last Word on the (Possibly) Pending Recession
Discussing the potential for job loss or financial hardship isn't remotely fun. But having a plan in place allows you to be nimble and empowered during a challenging time.
"The most important thing is to focus on what you can control because a recession is totally out of our control," Spencer says. “Make sure you’re protecting your own finances because that’s the only place we truly have control.”
Sources
Kimberly Palmer, a personal finance expert with NerdWallet
Stuart Boxenbaum, CFP and president of Statewide Financial Group in Florida
