5 Ways to Prepare for an Economic Recession

Navigating Economic Uncertainty

If you’re an adult living in the U.S. today, chances are you’ve experienced at least one economic challenge. Perhaps you weathered the COVID pandemic, the financial crisis of 2008, or the dot-com bubble bursting in the early 2000s.

After living through so much financial uncertainty, it’s understandable to hope that the hardest times are behind us. But being financially prepared means staying ready for whatever comes next–even the possibility of a recession. 

When it comes to a worst-case scenario like a recession — meaning a major decline in the economy that lasts more than a few months — the personal fallout can be significant: it could include anything from paying more for housing to taking on new debt or losing your job. 

While we can’t predict or control economic cycles, we can take proactive steps to strengthen our financial foundation. Here’s how to stay financially ready, no matter what the future brings.

Reevaluate and Adjust Your Budget

When your finances could be at risk, one of the best ways to avoid damage is to be proactive. Specifically, you’ll need to adjust your budget– ideally long before you’re in dire straits. 

There are two primary ways to create more breathing room in your budget: by cutting spending or increasing income. Reducing expenses usually yields the biggest savings while earning more money often provides a quicker boost. 

As you review your budget — which can simply be a spreadsheet or a piece of paper where you list out all your income and expenses — here are a few tips for making the most quick and effective changes: 

• Start big: For the biggest impact, review your largest expenses first. You’ll create much more room in your budget by selling your second car or renting out a spare room than by eliminating a few lattes here and there.
• Review your statements: Read your most recent bank and credit card statements to audit recurring charges, forgotten subscriptions, or areas of overspending. Make a list of everything you can reduce, eliminate, or cancel– including upcoming automatic payments.
• Keep an open mind: As you look through your list of expenses, identify your true necessities (think rent, food, utilities, medical care). For anything that’s not essential, be open to reducing the cost or eliminating the line-item altogether, even if it’s just until the economy is more stable.
• Diversify your income: Brainstorm to make a list of new income opportunities you can pursue. This might include taking on a temporary side gig or picking up extra shifts at work.

Build up (or Beef Up) Your Emergency Fund

One of the best ways to prepare for an economic hardship is to save money for emergencies. Having an emergency savings fund means that when money gets tight, you can use your savings instead of resorting to high-cost fixes like draining your 401(k) or paying bills with a credit card.

How much should you save for emergencies? Three to six months worth of living expenses is ideal, since it’s enough to keep you current on your bills, even if you’re without a job. But if you can’t hit that mark in the near future, saving any amount of money is better than none. 

Here are a few tips for jump-starting your savings:

• Set up an automatic deposit to your savings account from each paycheck, even if it’s a small amount.
• Move your savings to an account that pays competitive rates, like a high-yield savings account (HYSA).
• If you get a tax refund or a bonus at work, put the money directly into savings instead of spending the cash.

Need more ideas? Check out these money-saving tips that can help you stretch every dollar further.

Manage and Reduce High-Interest Debt

While there’s no single strict definition of “high-interest debt”, it’s often considered to be anything with an interest rate above 7% APR. This typically includes credit cards, payday loans, and can also apply to certain private student loans or even some types of mortgages, depending on the terms.

When you have high-interest debt, your finances can be perpetually erratic, since it’s nearly impossible to earn money fast enough to pay off the charges you receive. For example, if your retirement savings earns the average returns of 5% to 8%, it will never outpace you the average interest rate on a credit card, which is now over 21%.

Here are a few things you can do to pay off high-interest debt faster: 

• Debt avalanche method: Use any extra money you have to pay off the account with the highest interest rate first. Once it’s paid off, roll your funds to the next highest account. Continue that pattern until your high-interest debt is eliminated.
• Debt consolidation: If your credit is good, you may be able to qualify for a personal loan* or a 0% introductory APR credit card that you can use to pay off old debt. Personal loans are a lower-risk option than 0% intro credit cards, but monthly payments on a new credit card will be lower during the introductory period.
• Debt management plan (DMP): Talk to an NFCC-certified credit counselor to see if you qualify for a DMP or other help. DMPs can potentially help you lower your interest rates as low as 7% to 8% and allow you to consolidate multiple credit card accounts into one monthly payment. 

Avoid panic selling

During economically uncertain times, it’s common for investors to panic. For example, if you see your retirement balance drop, you might be tempted to stop making contributions to the account or even cash out your 401(k). 

But those instincts can lead to financial damage, since they go against these basic guidelines for investing:

• Markets fluctuate up and down, but you only lock in your losses if you cash out during a downturn.
• During a market downturn, you may have the opportunity to buy the same assets at lower prices.

Before you make any big moves, talk to a financial advisor. Avoid taking blanket advice, since the best option for you will depend on your personal circumstances, including things like how soon you plan to retire and whether or not you have emergency savings.

Enhance Career Resilience

Some industries are more recession-proof than others. For example, people who work in healthcare or the trades are likely to have job security when markets take a downturn. 

It’s a tough pill to swallow when you realize that your career path puts you at risk of losing income or employment, but it’s better to face the risk head-on than to hide from it. 

Here are a few strategies that can help you stay on top of what’s happening in your industry and adapt to impending changes:  

• Follow industry news: Read industry newsletters and join online industry forums so you can stay in-the-know about economic forces that might impact your job.
• Continuing education: Develop skills that make you better at your job or position you for a career change. Check to see if your employer pays for professional development courses or if you can find a free series on LinkedIn or Coursera.
• Build your professional network: Make a point to showcase your work and get to know more people at the office and beyond. The connections you make can eventually lead to new opportunities.
• Refresh your resume: Instead of waiting until you need a new job, update your resume and your LinkedIn profile now. Use information from your performance reviews to add measurable successes to both.

As the saying goes, “You can’t control the wind, but you can adjust your sails.” Sure it may sound corny, but it’s a helpful mindset when it comes to dealing with financial uncertainties. 

Unfortunately, you can’t control whether there’s a stock market crash, inflation gets worse or there’s a recession, but you can prepare your finances for a worst-case scenario. By doing things like saving for emergencies and paying off credit card debt now, you can be better prepared to weather a storm in the future.

*All personal loans made by WebBank.

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