How to prepare for a recession

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A recession is an economic event that makes it hard for the average person to meet their financial obligations. The financial uncertainty people experience during a recession can cause widespread panic and dismay. This uncertainty was evident during the Great Recession that followed the housing market crash of 2008, and more recently, in the wake of the COVID-19 pandemic.

However, you don’t have to be a millionaire to maintain a solid financial state during a recession. Let’s discuss what a recession is and how to prepare for one so you can be ready when it happens next.

What is a recession?

The National Bureau of Economic Research defines a recession as a significant downturn in economic activity for some time. Recessions occur regularly and can last anywhere from six to 10 months. But while economic activities can descend to their lowest levels in just a few months, it can take a country several years to recover from a recession. 

After the Great Recession, it took more than three and a half years for the U.S. GDP to rise back to its pre-recession level. According to the Center on Budget and Policy Priorities, the effects of the event on employment were still visible six years later in 2015.

A recession isn’t something to take lightly. It’s recommended that every consumer work to prepare for a recession, if they can.

Are we going into a recession?

After the Great Recession of 2008, the world experienced another significant recession in February 2020. However, while the 2020 recession was steeper than the 2008 Great Recession, it was also shorter. GDP in the U.S. started to rise by April of the same year.

Does that mean there won’t be another severe recession soon? This Forbes Advisor article suggests otherwise. Many economists say we’re currently in a mild recession and can expect another one in 2023. 

A severe recession can produce significant economic hardships for the average American, including:

• Higher unemployment rates
• Reduction of purchasing power
• Higher healthcare and education costs
• Increased homelessness and food insecurity

While it’s uncertain how long such a recession will last, there’s no reason for you to panic just yet. Here are a few tips on how to prepare for a recession so you can feel more secure if the economy continues to get worse in the near or distant future.

5 tips for preparing for a recession

1. Track your expenses and identify your priorities

A budget is something that anyone who is responsible for making purchasing decisions for their household should possess.

Use these steps to make an effective budget:

• Figure out the total household income. Sum up what every financial contributor in your house makes, taking into account money from side hustles and investments.
• Create a list of total monthly expenses. List all your regular monthly expenses, including grocery shopping, utility bills, car and health insurance costs, debt repayments, and childcare expenses, if you have any. Economic professionals suggest adding payments you make once a year to the list.
• Identify priority costs: Ask yourself which expenses can’t be postponed to a later date or month. You might have some trouble during this step because it requires total honesty. However, remember you’re preparing for the worst-case economic scenario, so consider costs like entertainment and eating out as luxuries.
• Create a bare-bones budget: Identify the items you can’t survive without, disregarding comfort or luxury. Some of the costs you can’t default on include rent, food, utilities, and healthcare expenses.

2. Build your emergency fund

The total amount of your bare-bones budget shows the minimum amount of money you and your dependents need to get through a month. Once you nail down the amount, begin putting a portion of your income into a separate savings account. This savings account is your emergency fund and should be your last resort when things go wrong.

How much should you save in an emergency fund? Financial consultants recommend having at least three months’ worth of expenses in the fund. However, since a recession can last six or more months, having a year’s worth of expenses saved in an emergency fund is a good goal to work toward.

You don’t have to put thousands of dollars into your emergency fund at once. You can build your emergency fund by counting contributions as part of your household’s monthly expenses. Take these additions as seriously as you do grocery shopping.

3. Pay down your debt—especially credit card debt

When lenders expect a recession, they can increase interest rates to pad themselves for the upcoming economic downturn. Such a move can make it difficult for you to keep paying off your debts, so make paying off your credit cards fast a top financial priority.

If you have a high-interest loan or credit card debt, call your bank or credit card company and negotiate a lower interest rate. Banks generally grant such requests, but credit card companies may not, so you need to research alternatives like the benefits and drawbacks of transferring the debt to a 0 percent interest credit card.

In case these methods for reducing your debt burden fail, you should still gradually work to pay off your debts. Making the minimum payments on your credit card, mortgage, school loans, and any other debts will reduce your burden in case a recession impacts how much you earn.

And if you need to default, call your lender and ask for a hardship accommodation. Don’t avoid the situation by staying quiet, since this may result in negative items that hurt your credit.

4. Be prepared for a potential job change

Thousands of people lose their jobs during a recession. Consider your current job position expendable, and use every opportunity to network and build crucial connections in preparation for the future.

You should also take every opportunity to increase your skills in your current and other fields. Add every successful training and job accomplishment to your resume and work portfolio. These strategic steps ensure you’re ready to jump ship whenever the situation requires it.

Another trick for surviving job uncertainties during a recession is finding a side hustle. You can find freelance work that requires the skills you use in your job or capitalize on a hobby like painting, knitting, or even shopping. Testing your capabilities in the gig economy before it becomes a necessity can help you keep your hands off your emergency fund longer during a recession.

5. Don’t dramatically change your investments

During a recession, many people make the knee-jerk decision to withdraw money from their stock portfolios, 401(k)s, and other long-term investments. Such a move is unwise and leads to massive financial losses when many can’t afford the risk.

When you put money in long-term investments, you anticipate that they’ll be affected by economic downturns. You can only reap the benefits of your investment if you stay put and analyze the situation to make rational decisions.

Investing during a recession may be an option for some people. Since the economic downturn lowers the price of stocks and bonds, if you have any extra money, you can purchase some of the most valuable market assets and benefit when the economy starts to recover.

Maintain your financial health

Good financial health is crucial whether or not you’re preparing for a recession. One of the easiest ways of ensuring your financial well-being is by maintaining good credit.

Our team here at Lexington Law Firm has helped thousands of people work to repair their credit. We’ll help you identify any inaccurate negative information and take the necessary steps to start getting your credit back on track. With our guidance on proper credit maintenance now, you might be in a better position when a future recession hits.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.