How to Prepare for a Recession: 6 Tips to Survive an Economic Downturn
A recession can wreak havoc on personal finances in many ways. Fortunately, these tips will help you prepare to weather the storm.
Contributing Writer at Tally
August 10, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Countless variables can impact your finances, and some are within your control. Unfortunately, an economic recession is one variable that can largely impact your finances, and you have no control over it. This lack of control can lead to some people panicking about what lies ahead.
Though you can’t control a nation’s economic activity downturn, you can brace for it with solid financial actions. Are you wondering how to prepare for a recession so its impact on you is as small as possible? Below, we outline six tips for weathering the storm and setting yourself up for balance during a recession and success when a recession ends.
How to prepare for a recession: 6 tips
When a recession looms, it’s easy to get overwhelmed by the doom and gloom you may hear on the news or from friends and family. Try to ignore the hyperbole and, instead, use these tips to prepare yourself to weather the storm of an imminent recession.
1. Remain committed to your investments
When you see the stock market slip into a bear market status — a drop of 20% or more from a recent high — it can cause havoc in your investment portfolio and can be a sign of an upcoming recession. This leads many Americans to either sell their stocks to stop the bleeding or stop investing altogether, including in their 401(k) accounts.
But it’s important to avoid knee-jerk reactions. Instead, experts recommend you develop a long-term investment strategy, lengthen your view a little during an economic downturn and don’t focus on the here and now.
Also, speak with an investment professional about adjusting your long-term investment strategy. These professionals will guide you to recession-proof or recession-resistant stocks that generally stay relatively consistent during a recession, like healthcare and other companies that consumers will need regardless of economic conditions. They may also recommend bonds to help balance your portfolio.
An investment professional can also help build a financial plan and guide you to stocks that may have fallen due to the recession that you can scoop up low and hold until economic growth returns and the stock rises again after exiting a bear market.
Employer-sponsored retirement accounts, such as 401(k)s, are also impacted in a recession. This can result in huge value drops, which may lead some people to stop automatic investments. While you may be losing money now, keep two things in mind.
First, like the open stock market, extend your investment vision out several years instead of the here and now. Once the bear market ends, the stocks in your 401(k) should recover over the next few years.
Second, if you get an employer match, you’re likely still making money without realizing it. For example, if you get a 100% employer match on up to 5% of your salary and earn $50,000 per year, your employer match can be up to $2,500 per year. That’s essentially free money.
The key action here is to not panic until getting solid financial advice from an investment professional. Avoid the temptation to anxiously sell your assets and eliminate your investment budget.
2. Pay off credit card debt
When a potential recession is looming, a recommended step for anyone with credit card debt is to get rid of it as soon as possible. During a recession, your cash will not reach as far as it once did, but the Federal Reserve continues increasing interest rates to stave off high inflation. Because most credit cards have variable interest rates, they’ll release interest rate hikes shortly after the Fed does. These rate hikes mean your monthly payments will take up a larger portion of your cash.
Paying off your high-interest debt will help you keep more cash in your pocket to use for necessities. You can pay down debt in various ways, including a lower-interest, fixed-rate debt consolidation loan, a low-interest line of credit, a home equity loan (HEL), a home equity line of credit (HELOC) or even a 0% balance transfer credit card.
If you can’t qualify for any of those options, you can contact your credit card issuer and request an interest rate reduction. It’s not guaranteed the credit card company will approve a reduction, but it’s worth a try.
3. Build an emergency fund
When a recession is possible, it can help to build a cushion to weather any potential job loss or wage reduction. Trim your budget as needed to create a surplus that allows you to start saving money until you have an emergency fund large enough to cover three to six months’ worth of living expenses during tough times.
If you put this cash in an accessible high-yield savings account, it can earn interest when you’re not using it. The interest earned will be small, but it’s free money nonetheless and an enticement not to touch your emergency fund unless you absolutely must.
Emergency savings is also part of great personal finance management, so it’s a good idea to build one even if there’s no recession coming.
4. Build a rainy day fund
In addition to your emergency fund, you might consider a smaller rainy day fund. This should generally be $500 to $1,000 to cover unforeseen day-to-day incidentals, like auto repair or replacing a broken appliance. A rainy day fund allows you to handle small financial bumps in the road without it affecting your monthly budget.
Like the emergency fund, consider placing your rainy day fund in an interest-bearing savings account so it earns interest while you’re not using it.
5. Take on a side gig
When a recession hits, layoffs sometimes follow. This is a time when you don’t want to put all your eggs in one basket — even if that basket is what seems to be a reliable full-time job. Taking on a side hustle before a recession hits gets your foot in the door and time to establish yourself.
You can work the side hustle part-time while retaining your full-time job. If your job continues without issue, the side hustle is just extra money. However, if you’re suddenly laid off, you can transition your side gig into full-time work to make ends meet until you find a new job.
6. Live below your means
When a recession strikes, you may be at risk of losing your job or potentially getting a pay reduction. Instead of rushing to cut expenses if this happens, you may think about making those adjustments now.
Go through your budget with a fine-toothed comb and find any places you can trim or eliminate expenses. Start with services you’re paying for and rarely or never use, like streaming services and other subscriptions.
Then, look at your monthly bills, like your cellphone or internet package, and see if you can downgrade to save money each month. You can also contact your credit cards and request an interest rate reduction, which will lower your minimum monthly payment and increase the impact any payments have on your balance.
Continue trimming and cutting expenses until your monthly cash outflow is lower than your income.
Be prepared before a recession hits
There is no way to predict, with 100% certainty, when a recession is coming. Yes, a bear market is a tell-tale sign, but it’s not an absolute indicator. However, when the signs of recession are present, that’s the time to think about how you can prepare for the worst.
If high-interest credit card debt is one of the things you need to tackle, consider the Tally† credit card debt repayment app. The Tally app helps you manage credit card payments and offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.