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How to Recession-Proof Your Finances in 7 Steps

Last updated 03/15/2024 by

Andrew Latham
It has been a long time since the U.S. economy was in a recession. So don’t feel bad if this one caught you by surprise. Yes, it may not be official yet, but we are at the beginning of a recession. How financially prepared are you?
What is a recession? Recession is a fancy way of saying the economy has stopped growing for at least six months. The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months. Usually, recessions are noticeable in the real GDP, real income, employment, industrial production, and wholesale-retail sales.”
First, let’s start with the obvious. Preparing for a recession when it has already started is far from ideal. It’s like planing your evacuation route in the middle of a hurricane. It’s still worth doing, but it’s better to plan well before disaster strikes.
The United States has had quite the run. In fact, it is the first time the United States has spent an entire decade without entering a recession. So, if you’re wondering what you should do to prepare for a financial downturn, you are probably not alone. This is what we recommend you do.

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1. Build an emergency fund

“In a recession, cash is king.” It may be a cliché, but that doesn’t make it any less true. One thing that characterizes recessions is uncertainty. This is why it’s essential to have three to six months in an emergency fund for life’s unexpected expenses.
Remember to pay yourself first. Consider personal savings as the first bill you must pay each month. If you haven’t been able to save because you have debts to pay, make minimum payments on all your debts and use any money left over to build your emergency fund.

How to build an emergency fund

  1. Calculate your basic monthly living expenses and multiply it by six.
  2. Open a savings account. Choose one without a monthly fee and a competitive APY, such as Betterment or UFB Direct.
  3. Set a monthly savings goal and stick to it.
  4. Automatically transfer funds to your savings account every time you get paid.
  5. Save your tax refund (if you get one).
  6. Sell stuff you no longer need.
  7. If possible, set up monthly automatic transfers to your savings accounts, so you take care of your savings goal before it even hits your checking account.
Having a healthy emergency fund will help you breathe a little easier during a recession. If you don’t have any savings, start with a manageable amount, such as $1,000, and then work towards saving three to six months of living expenses.

2. Pay off debt

Recessions often lead to layoffs and make it harder to find work. So, it’s essential to streamline your cash flow and focus on paying off non-mortgage debt as soon as possible. It will also help reduce stress during the challenging times ahead.

How to pay off debt

There are two main strategies when it comes to paying off debt: the avalanche method and the snowball method.

The avalanche method

  1. Make a list of all your debts. Write down the amount and interest rate you are paying.
  2. Start paying off the debt with the highest interest rate as fast as you can, while you make minimum payments on the other debts.
  3. Rinse and repeat until you are debt-free.

The snowball method

  1. Make a list of all your debts, but organize them from the smallest to the largest amount.
  2. Pay the smallest debt amount (regardless of the interest rate attached) as quickly as you can. Make minimum payments on the other accounts to avoid late fees.
  3. Rinse and repeat until your debt-free.
In theory, the avalanche method is the best choice. You will pay less interest and get out of debt faster if you prioritize high-interest debt. However, the snowball method has the benefit of giving you a psychological boost every time you pay of a small debt. A study by a team of Kellogg School researchers found that people with large credit card balances are more likely to pay down their entire debt when they follow the debt snowball method.

Debt consolidation

If you have a lot of credit card debt but still have a steady source of income and decent credit, we recommend you consolidate your debt at a lower interest rate today. SuperMoney’s debt consolidation loan offer engine makes it easy to check what rates you qualify for across competing lenders. A debt consolidation loan can improve your credit score, get you on a path to becoming debt-free, and also free up credit for emergencies.
If you owe less than $15,000, consider applying for a balance transfer card.

Debt settlement

If you have fallen behind in your payments, your total consumer debt is more than half your annual income, or you can’t afford to repay your unsecured debt within 5 years or less, consider the path of debt settlement.
A debt settlement requires creditors to accept less than the total amount you owe. It has the benefit of lowering your total debt amount, but it will destroy your credit and the fees debt settlement firms charge can be expensive.

3. Be frugal and live within your budget

During tough financial times, we may be forced to cut back on unnecessary spending. Learning how to live (and love) a frugal life will help you increase your savings and give you the flexibility to adapt when money gets tight.
How to be frugal
Make smart financial choices and reduce your expenses. Here are ten things you can do today to save money.
  1. Cancel your cable account and settle with what you get from Amazon Prime. Or get free T.V. with a digital antenna.
  2. Cut back on your phone and internet services.
  3. Stop eating out.
  4. Stop smoking.
  5. Reduce your insurance premiums.
  6. Avoid expensive vacations.
  7. Consider downsizing your home.
  8. Shop at thrift stores.
  9. Cancel your gym membership. Go for a run or do home workouts instead.
  10. Sell your second car and carpool as a family.

4. Diversify your investment portfolio

Picking stocks and timing the market is difficult. Unless you are a full-time professional trader, you are likely better off buying index funds.
How to diversify your investment portfolio
If you are not an experienced investor, it’s probably best to use a brokerage or an investment advisor, such as Betterment or Personal Capital to create a diversified portfolio. However, if you want to try to diversify your portfolio on your own, try this.
  1. Spread your investments across different asset classes, such as equities, bonds, emerging markets, real estate investment trusts, and commodities.
  2. Invest in index funds whenever possible. Index funds make it easier to achieve your target allocations and help you avoid putting all your eggs into one basket. For example, for U.S. equities, you can invest across the entire S&P 500 by buying shares of SPDR S&P 500 ETF Trust (SPY). Or, if you want to target tech stocks, you can buy Vanguard Information Technology Index Fund ETF Shares (VGT).
  3. Select investments across different sectors and industries. This increases your chance of picking a winning investment and reduces the risk of losing money in a recession.
  4. Rebalance your portfolio every six months. You may not have to change anything, but it’s good practice to check your portfolio is consistent with your financial goals and risk tolerance.
Doing all this yourself can be difficult if you are not an experienced investor. As mentioned above, investment advisor companies, such as Betterment and Personal Capital, make it easy to determine the best way to diversify your portfolio based on your financial situation.

5. Continue investing in your retirement fund

It’s tempting to sell off your investments during a recession because it looks like you are losing money every day the stock prices drop. However, those losses are only on paper. They aren’t real losses until you sell those stocks. If you chose the assets in your portfolio wisely, you should probably not rush to sell just because the market is hurting. On the contrary, holding your position and even buying more as prices go down could increase the return of your savings over time.
How to continue investing during a recession
  1. No matter how grim things look, don’t stop investing in your retirement accounts. The only exception should be if you don’t have an emergency fund.
  2. If you don’t have an emergency fund, stop investing until you have saved at least three-months-worth of living expenses. Then get back to making regular contributions (even if it’s just $50 a month).
  3. Check your long-term investment plan is still sound and commit to it.
  4. If you are close to retirement, consider moving your money into low-risk fixed-income securities, such as bonds.

6. Diversify your sources of income

Relying on a single source of income is particularly risky during a recession. If the economy tanks and you lose your job, your entire income stream will vanish. You can only cut so many expenses, but there’s no set limit to how much you can increase your income.
How to diversify your sources of income during a recession
  1. Pick up more shifts at work or volunteer for overtime.
  2. Get a second job or side hustle, such as working for Instacart or Doordash.
  3. Start a small business.
Although you can set up several streams of income by getting a second job or starting a small business, diversifying your income doesn’t have to mean more work. For instance, if you have a partner that also works outside the home, try to choose a job in a completely different industry to your partner. That way, you still will be able to pay the bills if one of the industries you work in collapses.

7. Invest in your education

One of the best ways to recession-proof your life is to invest in learning marketable skills. Instead of focusing exclusively on subjects you are passionate about, consider certifications, degrees, or diplomas that will help you qualify for a job that is in demand.
How to invest in your education
  1. Choose careers and specializations that provide the best return on your investment. The Bureau of Labor Statistics offers regular updates on the growth rate and median pay of the jobs that have the highest demand.
  2. Start by checking your state community colleges. Sometimes it is possible to get free (or very low-cost) tuition in an associates-degree program or vocation school. If the program you are interested in is not free, check what student loan rates you qualify for.
  3. Go to your local library and get free textbooks and manuals available in your field of choice.
  4. Take free (or real cheap) open online courses at top universities with platforms like Coursera and edX.
  5. Check for government adult training programs available in your area.

Stay calm and recession-proof your finances

The key to weathering a downturn in the economy is to make a solid plan and stick to it. Recessions are, unfortunately, a natural part of the business cycle. They don’t have to wreak havoc in your finances if you diversify your investments and sources of income.
A recession might require you to make changes to adapt to the “new normal,” but if history tells us anything is that all recessions end. If you are relatively young and retirement is still decades away, you can even view lower stock market prices as an opportunity for growth. However, that only works if you stay the course and continue to invest your savings at lower prices.

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Andrew Latham

Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.

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