There’s a lot of talk about an impending recession, if you’ve been following the news at all. Of course, as a Certified Financial Planner™, I don’t advocate listening to the news all the time, as newscasters’ takes on the markets aren’t necessarily aligned with your interests. I know this is always a concern for many people, so knowing we cannot prevent a recession, what can we do to properly prepare?There are a few things you need to know about how to prepare for a recession — because you can. But first, you need to know what a recession actually is (no, it doesn’t mean the Great Recession is coming again).

What’s a recession — really?

The Oxford dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” Aside from the technical jargon, this essentially means that the economy is temporarily not growing. 

The economy could be stalled for a number of reasons, from political tariffs to increased gas prices to conflict in other countries. How the stock market reacts to this stagnation is usually the biggest cause of a recession; stocks decline due to market uncertainty, companies don’t grow and, as a result, there is reduced availability to spend on programs and employees. Of course, the impact of a recession on a person highly depends on their situation in life. Some people lose their job, and some people’s retirement and investment accounts go down. If you’re retired and depending on your investments for income, it’s a big deal.

And when people experience a crunch on their income (whether employed or retirement income), they spend less. As a result, businesses don’t benefit from consumer spending. It’s a cycle, one that is rectified over time as the markets stabilize and more money enters the market.

Yes, this is highly over-simplified, but I am simplifying it to make a point: a recession is a normal market cycle. I would also like to highlight that a recession is not a depression. Recession means the economy isn’t growing as quickly as it was before, whereas a depression is an economy that can’t bounce back. And recessions are a normal part of market cycles: there have been 33 recessions in the United States since 1854.

With all of that said, let’s talk about what a recession might mean for your personal finances and how you can prepare.

Preparing your personal finances for a recession

Because we are not in an “active” recession right now, it might be easy to blow off any concerns and continue with business as usual. This is the first point of caution I want to draw attention to: lifestyle creep can get you. When things are good, we all spend more. But when things go downhill, we begin to wonder if those extra dinners out or that expensive purse was worth it in the face of a looming recession. So my first recommendation is to look at your discretionary (optional) expenses to see where you may be spending more.

From there, you should also look at:

  • Your sources of income and if there are ways to grow those (sometimes there isn’t and that’s OK!)
  • How much you are saving or investing each month
  • The size of your emergency fund (most experts suggest having 3-6 months of expenses on hand in case of job loss or emergency)
  • How much debt you’re carrying
  • What types of insurance you have (life, disability, etc.)

Let’s dive into each of these and see what you can do to keep your income and personal finances stable even if the market isn’t.

Income and career stability

The best time to protect your income and job isn’t when you’re in the middle of a recession, unfortunately. It’s when things are going well. Spend some time building skills, asking for additional training or responsibilities, and making yourself indispensable to your company or clients. While not every recession will cause companies to lay people off, it does help to make yourself a vital employee or service provider so that companies know they can’t operate with you.

If you don’t have a traditional job or have variable income, now (as in, before a recession hits) is the time to find more work, raise your rates, or seek a long-term contract that can help you ride out any waves. And for those who have steady income but want to set more aside “in case of emergency,” you can always consider taking on evening or night work, starting a side hustle, or taking odd jobs in the neighborhood to bring in some extra cash.

It never hurts to get creative when you’re trying to recession-proof your finances. If you’re in a relationship, team up with your partner to see how much money you can sock away for an emergency. It doesn’t have to be forever; just until you feel you have enough to weather a storm.

Savings and investments

If you have automatic transfers set up to your savings or investment accounts, you are likely already on track to fill your emergency funds. Once you get there, don’t stop saving! You can consider opening a higher interest savings account, or increase your contributions to your work or personally owned retirement accounts. Keep building on that momentum, and save or invest as much as you can.

If you’re not setting aside anything (or minimal amounts) to your emergency fund or other savings, now is the time to buckle down and make it happen. In general terms, you should consider saving 25% or more of your income until your emergency fund is covered. Of course, this might not be possible, but save as much as you can. Depending on your exact job, your needs, and your family or home situation, you also might want to consider upping your emergency to cover at least 6 months. This can help you weather a recession-related job loss without scrambling to cover your mortgage, childcare, and other expenses you can’t stop paying if you lose your income.

There’s another important point I want to cover: it can be scary to watch markets fall if you’re invested in the stock market in any capacity (individual stocks, IRAs, mutual funds, etc.). One of the most damaging long-term financial decisions people make is pulling their money out of the stock market when the market is down. Instead, talk to your advisor or your Certified Financial Planner™ to see how to adapt to the new market changes. In many cases, your planner or advisor may recommend investing more so you can buy more shares at lower prices and benefit from the boom once the market goes back up. Talk to an expert, and don’t react from a place of fear. That can cause you to lose out on loads of money over the life of your investments!

Debt and loans

The truth is, the average American has about $38,000 in personal debt — and that doesn’t even include a mortgage. So, when we have a conversation about a recession, we need to have a conversation about debt. There is a difference between mortgages, student loans, business loans, and even necessary car loans and consumer debt, though. Sometimes, we need to take out loans to afford the things we have in our lives, and that’s OK if you can afford those payments. But other debt, like high-interest credit card debt, payday loans, and personal loans can spell trouble in general, but especially if the market takes a downturn (which it will eventually).

To address this, you should start by paying off your high-interest credit cards or loans as soon as possible. If you’ve let balances rollover on a certain card, focus on those first as the compounding interest means you’re going to pay much more in interest than you’d want! If you have a lot of consumer debt, make sure you build up an emergency fund of at least $1,000 before you start throwing more money at the balances. After that, though, send as much as you can to your debt.

For other loans that maybe have a higher interest rate (anything over 6%), you might want to look into refinancing. Car loans, mortgages, and even some business loans can be refinanced to save you money on monthly payments and interest payments over the life of the loan. Again, you’ll want to talk to your Certified Financial Planner™ or loan holder to discuss this, as it might not be beneficial in every case.

Insurance coverage

From the outside, suggesting that you increase your insurance coverage for things like disability and life insurance might seem odd in the face of a recession. Why should you pay monthly or annual premiums when you need to save money? Well, it’s simple: on top of decreased income and employment opportunities in a recession, you don’t want to add another disaster to the list.

Consider your life insurance coverage: if something happens to you in the midst of a recession, how will your family fare? And if you have a severe accident or illness during a recession, how will you pay the bills? This is why most Certified Financial Planner™ professionals will tell you to increase insurance coverage. You can also look at healthcare coverage options if you’re not employed with benefits, and even talk about business insurance to protect your family from mishaps with your side business. Insurance is highly specific to your needs, so you should definitely speak to your planner or a trusted insurance agent.

Keep the big picture in mind

This may seem like a lot of preparation for something that might not affect you that much, but the truth is: you can never be too prepared, especially when it comes to your finances. Take the time to build your emergency funds, set aside as much as possible, and pay down any debt you may have. This will take time, which is why I’m asking you to start now. You’ll thank yourself in the future if and when things get rocky.

A final note: keep the big picture in mind. A recession is temporary — and depressions, too. Do what you can now to protect yourself and your money, and keep your long-term financial success in mind when you consider new purchases or pulling from your investments.