With the way the financial media covers the economy, it’s no surprise that from time to time, you might wonder how to prepare for a recession.
Luckily, there are some solid, common-sense, basic things you can do to prepare your finances for a recession, although quite frankly, your mileage may vary. It’s easier to prepare for a recession depending on when it hits in your life, and if you’re already employed and earning money, it’ll be easier than preparing as a student about to graduate.
However, no matter who you are, the basics remain the same. You’ll want to make sure to tackle the steps that are going to be overall great for your finances even if a recession is years away, but you’ll equally want to avoid the panicky fear-based moves that can actually hinder your financial situation.
Because say it with me now:
“If I could accurately predict what the financial markets would do and when, I could be making way more money as some highly paid analyst somewhere, and even then I’d be wrong some of the time.”
The real key here is “and when,” because the bad news is there will be another recession. Preparing for it is smart, as long as you don’t fall into the trap of thinking you can predict when it will happen—that’s what gets a lot of people in trouble.
How to prepare for a recession:
- Pay down your debts
- Don’t take on new debt
- Take advantage of credit offers
- Build up your emergency fund
- Track your spending
- Understand where you can cut back
- Start a side hustle
- Keep your resume up-to-date
- Don’t stop investing
Pay down your debts
Being debt-free is one of the best ways to give yourself flexibility, recession or no recession. The money you spend towards paying down your debt every month gets freed up as soon as you’re debt free, and even if “fully debt free” is a ways out on the horizon, lowering your debt means you’ll pay less interest over time if you need to drop down to minimum payments to make it through some time between jobs.
Tackling your debts is a great, fool-proof way to prepare for a recession.
Action item: Review your current debts and how much you’re paying towards each one. If you can, bump up your payments on at least one of them.
Don’t take on new debts
On the flip side, if you’re worried that the economy might do a lil nose-dive sometime soon, it’s best not to take on big new debts if you can help it. Maybe that means postponing a new car, not taking on a kitchen reno unless you can pay for it in cash, or just the always-advisable move of not putting a vacation on your credit card.
The fewer debts you have to manage, the fewer payments you’ll have in your budget in the worst-case scenario.
Action item: Don’t buy that expensive thing if you need to put it on credit.
Take advantage of credit offers
If you’re getting a bit of financial-advice whiplash because I just said not to take on new debt, I understand—but getting more credit doesn’t always mean taking on more debt.
This is something I struggled with early in my career, because I thought that increasing my credit limit was forever and always a Bad Move. More credit meant more debt, right? Wrong.
During a recession, it’s harder to get approved for new credit, like a line of credit or an increase on your credit card limit. Meanwhile, it’s when having available credit might come in handy, especially if you didn’t go into the economic downturn with a fully-stocked emergency fund. By taking an increase to your credit card limit or getting a line of credit now, you’ll have it available in the worst case—the trick is just to make sure you only use it in the worst case.
Action item: Ask your credit card company or your line of credit issuer to raise your limit if you know you won’t spend it unless it’s an emergency.
Build your emergency fund
All things being equal, I’m a big fan of relying on your emergency fund, not a line of credit, to handle emergencies. That’s not everyone’s take, but it’s mine for a few reasons, and the main one is feelings.
Does pulling money you diligently saved out of your savings account suck? Sure. Does it suck less than knowing that every time you need to get groceries during a potential layoff, you’re putting it on a line of credit or a credit card, and seeing that balance go nowhere but up? Definitely.
Action item: Start an emergency fund with a high-interest online bank like EQ Bank to keep your savings out of sight. If you have one, bump up your contributions if you’re able.
Track your spending
If you don’t track your spending, I will bet you money that you can’t tell me how much you spent on groceries or coffee or lunches last month. Sure, you probably have an idea, like “My budget for food is $300” but speaking as someone who still goes shockingly over her grocery budget some months, I am confident that your budget doesn’t mean you spend exactly $300 on food every month.
The best time to figure out what you actually spend is now, before a recession hits and you’re trying to cut back. You’ll have a baseline number to work from, and on top of that, you’ll probably be able to identify patterns to help cut back if that’s what’s needed.
Action item: Commit to a week of manually tracking your spending, either in a spreadsheet or a notebook.
Understand where you can cut back
All of your budget line items roughly fall into one of two categories: wants and needs. You need to spend some money on food, but you want to spend money on restaurants.
To prepare for a recession, make sure you have a good understanding of which line items are which. Knowing where you can cut down on wants in your monthly budget is the best way to understand your baseline level of spending each month—the amount you need to spend to keep the lights on and a roof over your head.
That number is incredibly powerful, since it will help you calculate how much to save for an emergency, not to mention how long your savings will cover you in a recession if you do lose your job.
Action item: Figure out your “bare bones” budget—the dollar figure you need to spend every month to make all your bill payments and
Start a side hustle
Diversifying your income beyond just a full-time job gives you so much security that it’s honestly hard to quantify. When you have other streams of income, losing your main income source might sting, but it involves far less panic. Your other streams of income can help reduce how much you need to save in an emergency fund, and they’ll give you a ton of peace of mind at the same time.
Think about what you could do to earn extra money, and start working towards making it a reality. Maybe you have a skill you can teach, or sell to other people or companies. Maybe you want to start a blog, or selling crafts, or dog walking. There are so many wants to earn money outside of your full-time job, and although yes, it takes time, it can be very, very worth it.
Plus, you can use your earnings to accelerate your other goals in the meantime, like paying down debt or building up that emergency fund.
Action item: Write down 25 ways you could earn extra money. Yes, actually 25.
Keep your resume up-to-date
What was the most impressive thing you did at work last year? Do you remember the results of that stretch assignment you took on? It’s hard to dig up the details when you’ve been away from them for a while, so make sure to keep track of your accomplishments at work—and make sure they make their way to your resume sooner rather than later.
If the time does come when you need to start sending that resume out, it’ll be up-to-date and chock-full of your most impressive moments. If a resume isn’t the best way to get hired in your industry, do the same for the relevant tools you have, like your website or your portfolio.
Action item: Dust off your resume and see what needs updating ASAP since your last review, and keep a running list of accomplishments going forward.
Don’t stop investing
It drives me absolutely batshit seeing people advocate that everyone should pull their money out of the stock market or avoid starting to invest because there’s a recession coming, for so many reasons.
- No one knows for sure what the future will bring. No one.
- Waiting for the next recession to invest is a very squishy goal. What counts as a recession? Will you invest when the market goes down 5%? 10%?
- If you’re not investing already, trust me when I say that when the market is going down in a recession, you’re not going to feel better about putting your money into investments than you do right now.
- If you are investing, and you pull your money out of the market, you’ll miss out on potential gains between now and the upcoming recession—and you’ll need to try to time the market to get back in.
Instead, look at investing as an important piece of your long-term money puzzle—and yes, that means much longer-term than the next recession. Make your investing decisions based on things like your goals, your timeline, and your risk tolerance, and not predictions about what might happen next week or next month.
Action item: If you’re not yet investing, take the first step towards learning more with a free investing course or a book. If you are investing, stick to your plan.
Preparing for a recession can be a good financial move
As long as you avoid jumping into market timing with both feet, preparing your overall personal finances for a recession can be a smart move. Even if a recession is years out, you’ll have a stocked emergency fund, solid budget, available credit, lower debts, more than one income stream, and an up-to-date resume to see you through the worst of it.
And while those are all excellent moves for your finances even when times are good, when the recession does come around—because it will eventually—you’ll be really happy you did all that prep while you could.