How to Prepare for a Recession

Recessions occur when growth stops and the economy starts to shrink. They're inevitable, but unpredictable. And you can take steps to better prepare your finances.
By NerdWallet 
Edited by Robert Beaupre

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

The coronavirus pandemic began as a public health concern, but it wasn’t long before the fallout from the spreading outbreak began to raise troubling economic questions. The 2020 recession was the shortest on U.S. record

National Bureau of Economic Research (NBER). Business Cycle Dating Committee Announcement July 19, 2021. Accessed May 11, 2022.
. But inflation and other worries have consumers worried about what might be ahead.

Understanding recessions

A recession occurs when economic growth stops and the economy starts to shrink. Recessions are inevitable, but they aren’t necessarily predictable. It’s impossible to know in advance exactly when they’ll hit or how bad they’ll get. (See the difference between a recession and depression.)

Some recessions are mild. Economic activity declines and unemployment rises, but the economy quickly recovers. Other recessions, such as the 18-month 2007-to-2009 downturn often referred to as the Great Recession, wreak widespread havoc on millions of people’s financial lives before economic growth resumes. And that downturn would be followed by more than a decade of economic growth.

You can’t control what happens to the wider economy, but you can take a few steps to help you survive the financial headwinds.

Start with a spending plan

If you’ve never had a budget — or have one you never consult — take another run at making one. Knowing where your money is going helps you prepare for and adjust to tough times.

This is particularly true if you’re expecting a decline in income, whether from a job loss or another factor. If a recession interferes with your ability to cover your expenses, your first step may be to pay bills strategically and know where to find assistance.

If you are able to meet expenses but still want to improve your financial footing, the 50-30-20 budget is a solid choice to assign dollars to needs, wants and savings or debt payoff. Using online tools to track your spending or a budget worksheet can help you remember to include expenses that don’t happen every month, such as car maintenance.

Once you know where your dollars are going, look for places to trim. Finding ways to save money can help you bulk up that emergency fund (more on that below) or proactively lower your debt load.

Also, consider ways to make extra money. A side hustle not only feeds your emergency fund and financial resilience, but it also gives you a Plan B to help out if your hours or wages are cut.

Not about spending, but still important to consider early: If your field of employment is vulnerable to a recession but you’ve not yet been laid off, keep your resume updated and be diligent about networking. It’s wise to have a game plan to handle job loss to help you through the immediate aftermath.

Worried About the Economy?
Manage your finances in the face of rising prices, market volatility and recession worries.

Bolster your savings

Start with the savings you have now and try to build them as much as possible. That can be difficult in the face of a drop in income, but if you’re able to save even a little each month, that cushion will likely come in handy down the road.

If you do have some savings, one step you can take today is to switch to a high-yield savings account. Recent Federal Reserve rate increases have led to banks bumping up their yields. Some accounts, particularly at online banks, earn rates north of 3% APY. Compare that to the average savings rate of 0.24% APY.

From there you can build your account balance over the next few months by setting up or increasing an automatic transfer from checking to savings on a regular basis, such as on each payday. Saving your tax refund and any other windfalls also could go a long way toward preparing an emergency fund.

In addition, make sure you’re not paying monthly fees. Some banks will waive surcharges if you keep a minimum balance amount. But if you’re concerned about paying monthly fees in the future, consider putting your money in a “free” account that does not charge them at all.

» Looking for online savings options with good rates and low fees? Check out NerdWallet’s best high-yield online savings accounts.

Curate your credit

High-interest debt — like credit card debt — can be especially difficult to shed when money is tight. Interest charges pile up quickly, especially when interest rates are rising. If you’re making only the minimum payment while adding new charges to the balance, the debt can quickly balloon and become unmanageable.

You could consider moving your high-interest debt to a card with an introductory 0% APR offer on balance transfers. You’ll generally need good or excellent credit (credit scores of 690 and higher) to qualify for such an offer, and in most cases, you’ll have to pay a balance-transfer fee of 3% to 5% of the amount transferred. But such a move could save you a bundle in interest charges, especially if you pay off the debt during the promotional period.

If you can’t qualify for one of these offers, making extra payments on high-interest debt instead is also a good money-saving option. The faster you can pay off those balances, the more you’ll save in interest charges.

Also, take care of your credit. In unpredictable times, you may need to lean on credit — for example, to cover expenses when your hours are cut or to pay unexpected bills. Having good credit can not only give you the option to borrow money but it also can get you the best terms, such as low interest rates on loans or 0% APR offers on credit cards.

Double down on good credit habits, if you have the resources to do so while meeting all your other financial obligations. Pay bills on time. Stay well below the limits on your credit cards if you can. Make a debt payoff plan. Be selective about applying for new lines of credit.

All the while, keep tabs on your credit score. You can do this for free on NerdWallet, with credit card issuers and banks or through other third-party websites.

Study your student loan strategy

Federal student loan payments remain automatically suspended — without incurring interest — until some time in 2023. The policy does not apply to private student loans. If necessary, you can divert cash to other, more urgent needs in the meantime.

If you can afford your student loan payment, consider continuing to making payments. You'll chip away at your principal balance even more quickly while new interest is suspended. Contact your servicer to make payments. But if you experience a significant financial change — like a job loss — you have a few options to ease the burden of your federal student loans once the payment waiver period ends:

  • Get on a new repayment plan. Income-driven repayment caps payments at a portion of your discretionary income — between 10% and 20% — and forgives your balance after 20 or 25 years of payments. Contact your servicer for more information and submit an application at This is your best long-term solution.

  • Find out if you qualify for deferment. If you’re underemployed or unemployed for a longer period of time, then contact your servicer about unemployment deferment or economic hardship deferment. If you qualify, you could defer loans for up to 36 months, but interest will accrue.

  • Request a pause on payments. Forbearance is best for temporary relief because interest will continue to accrue and be added to the total you owe.

If you have private loans, contact your lender about options for relief. Most private lenders offer forbearance or deferment up to 12 months or longer. Interest will continue to accrue.

On the other hand, if you don’t anticipate taking a hit financially during a recession, then you can take advantage of low interest rates by refinancing your loans. That means trading out your current student loans for a new one with a lower interest rate. This is best for private loans. You can refinance federal student loans, but you lose out on income-driven repayment and opportunities for forgiveness like Public Service Loan Forgiveness.

Federal student loan borrowers should also keep an eye out for any broad student debt cancellation that may be on the way — it's likely to be $10,000 per borrower and may include an income restriction.

Keep calm and invest on

This isn’t the easiest advice when the news is dominated by falling stock prices. But there is a bright silver lining to market downturns: Your regular investing contributions now purchase more stocks and fund shares than when the market was at record highs.

It’s natural to want to sell during market drops. Behavioral economists call it “loss aversion.” Studies suggest people feel the loss of $1 twice as much as a $1 gain. This instinct means they have a tendency to sell stocks when a buy-and-hold strategy would be smarter.

When you sell shares as prices are falling, you lock in losses. Studies show that even professional investors usually fail when trying to time the market (predicting when to buy low and sell high). Instead, patience and regular reinvestment through dollar-cost averaging pay when you’re investing for the long term.

When you sell shares as prices are falling, you lock in losses. Instead, patience pays when you’re investing for the long term.

As our market crash calculator shows, even after the 2007-2009 Great Recession — the biggest downturn since the Great Depression — the S&P 500 regained its previous high five years and five months after hitting bottom. And then continued to rise for nearly seven more years.

A time-tested tactic: If you’re investing for the long term with a diversified portfolio, don’t torment yourself by checking your portfolio value every day. Instead, remember your long-term goals and the market’s historical ability to rise from the ashes (and beyond) over time.

Video preview image

And if you've not been saving before now? It's still a good idea to begin devoting what you can to retirement savings.

Reconsider your real estate

If you’re a homeowner, your game plan varies based on whether you want to sell or stay put. If you’re a renter, you'll have to focus on expenses.

Advice for home sellers

If you plan to sell your home, gather information about your local housing market from news sources, real estate agents and neighbors. Pay special attention to inventory — how many homes are for sale in your community. An increase in inventory means buyers have more homes to choose from, giving them more leverage when negotiating with sellers.

Nationally, home prices have been rising at double-digit annual rates every month since August 2020, according to the National Association of Realtors. Prices have been going up rapidly during this period due to low housing inventory. It has remained under 1.5 million units since August 2020, the same month when year-over-year price growth surpassed 10%.

Inventory has been going up since bottoming out at 850,000 units in January and February. As inventory increases, buyers will regain negotiating power because they will have more choices. They will favor sellers who set realistic asking prices and are willing to negotiate. Take note if you list your home for sale.

There's no guarantee that home prices will fall, but runaway price increases are expected to slow to a walk. The National Association of Realtors forecasts that year-over-year existing home prices will rise 4% in the first quarter of 2023, down from 15.3% in the first quarter of 2022.

The timing of your home sale depends on personal factors as well as market conditions:

  • If you sell while inventory is low, you might sell quickly and on your terms. But if you buy a home to replace the one you sell, you'll have a limited selection and not a lot of negotiating leverage.

  • If you wait and sell when there is more inventory, you might have to compromise when negotiating with the buyer, but you'll face a friendlier market when you're shopping for a house.

Advice for homeowners staying put

If you’re planning to stay in your current home, build up your savings to protect yourself in case you're laid off or your hours are reduced. NerdWallet's guideline is to eventually build up to three to six months' worth of expenses. It's OK to start with smaller goals and build over time; research shows even $500 can be enough to insulate from the most common financial shocks.

A home equity line of credit, or HELOC, can be used as a last-resort emergency fund. Apply for a HELOC while you still have steady income; otherwise, you won't qualify. Take care not to overextend yourself when borrowing from a HELOC: The interest rate is often variable and will go up every time the Federal Reserve raises the federal funds rate.

» Home equity borrowing: HELOC vs. home equity loan

Advice for home buyers

If you plan to buy a home, have realistic expectations about what you can afford and make sure you have a financial cushion to protect you in the months after you buy. That means knowing what you can afford and bulking up your reserve savings. To avoid buying too much home, use NerdWallet's home affordability calculator and choose a price in the "affordable" range, not in the "stretch" or "aggressive" ranges.

When you buy a home, the lender will scrutinize your finances to make sure you'll have some money in savings after closing. If you're buying a single-family home as your primary residence, the lender might require you to have up to six months' worth of house payments in savings. Save up more than the minimum required reserves, so you'll be able to afford an emergency repair or an interruption in income.

Advice for renters

Times are tough for renters because rents have risen in much of the country. It's enough to persuade some to look for homes to buy, just to stop being vulnerable to rent increases.

Ever-rising rents make it harder to save money for a down payment on a home purchase. It's easier said than done at a time of high inflation, but start reducing expenses so you'll have money saved to pay the rent if your income is interrupted. Consider adding a roommate or moving in with family, and look for other ways to save money.

It would be risky to sit on the sidelines in expectation that house prices eventually will fall. Mainstream housing economists generally aren't forecasting a drop in house prices, although they expect them to rise more slowly. On the other hand, you can give yourself time to save for a down payment while continuing to rent.

Staff writers Margarette Burnette, Anna Helhoski, Holden Lewis, Bev O'Shea, Claire Tsosie, Kevin Voigt and Liz Weston contributed to this report.