How to Prepare for a Recession

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^[0]

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.

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.

» RELATED: What is stagflation? Are we experiencing it now?

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.

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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.