Hearing the word “recession” often sparks anxiety and understandably so. Economic downturns can bring job losses, stock market declines, rising prices, and serious financial stress. But the truth is, while you can’t prevent a financial recession, you can prepare for one and even thrive during it. In this guide, you’ll learn 10 essential ways to recession-proof your finances and come out stronger on the other side.
Preparing for a recession is essential to your financial security. Knowing how to prepare for a recession gives you a powerful advantage. It allows you to protect your finances, minimize risk, and stay in control during times of economic uncertainty. Whether you’re worried about your job, investments, or savings, taking smart, proactive steps now can help you weather whatever the economy throws your way. That said, let’s get into what it all means and how you can prepare for a recession.
What is a recession and how does it affect your finances?
A recession is a period of negative economic growth that typically lasts for at least two consecutive quarters. It’s marked by a slowdown in overall economic activity – things like reduced consumer spending, job losses, falling income levels, and a dip in business production. We might also see a drop in real estate values and a decline in investment values.
The National Bureau of Economic Research (NBER), which officially tracks U.S. recessions, defines it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
In simpler terms? It’s a tough economic season that affects just about everyone and being prepared for it can make all the difference.
That said, economies work in a cycle. That means they go through periods of expansion and growth, as well as periods of decline known as recessions. For example the great recession of 2008, which was triggered mainly as a result of the housing bubble in the United States. Or the global recession that came about due to the 2020 pandemic. More severe cases are known as depressions, such as the Great Depression in the 1930s.
What changes during a recession?
Recessions can be damaging to stocks and assets, causing them to lose value.
A recession could also cause interest rates to drop. The Federal Reserve may decide to cut rates to make it cheaper to get loans and borrow money in an effort to try to stimulate the economy.
In addition, this means you will see rates drop on your savings accounts too.
The government debt may rise as they pass bills for stimulus packages to assist those in need. And also to help the economy rebound and recover.
All of this doesn’t mean you shouldn’t invest during a recession, though.
In fact, if you’re wondering is now a good time to invest, it can be if you do it right and work on tackling any stock market fear you might have.
How to prepare for a recession financially: 10 Essential steps
Recessions happen, but you can be ready for them. Here are ten key tips for how to prepare for a recession.
1. Assess your finances before a recession hits
Before you start to make a plan for a recession, consider what your finances look like right now.
For example, what are you currently paying for in your monthly expenses list? You likely have some necessary expenses, such as your mortgage or childcare.
But are there things that you really don’t need or can afford to cut back on?
For instance, dry cleaning, hair and nail salon appointments, restaurants, etc. Perhaps you’re spending too much on non-essential things and living a champagne lifestyle that you can’t afford.
In that case, cut back for the time being so you can use your money for more essential matters.
2. Cover your basic needs before investing or paying off debt
Perhaps you assessed your finances and found out some surprising things. If you can’t afford your current lifestyle, or you are struggling to pay your bills without debt each month, it’s time to make some changes.
For instance, before using my money for investing or paying off debt, I like to be sure that I can pay for all of my basic necessary expenses. Rent, groceries, insurance, etc., are all things to pay for before doing anything else with my money.
If you need to make more income to afford your basic bills, consider a side hustle or a second job. Then you can change your focus to paying off debt, investing, building an emergency fund, etc. Doing so can help you in your future by preparing you for a recession.
3. Build an emergency fund
As you work on getting your finances ready for a recession, it’s very important to have emergency savings in place. In a recession, having an emergency fund can save you a lot of stress. It acts as a safety net with enough money to help you during difficult times.
You’ll avoid becoming financially over-extended or having to leverage debt just to get by. The importance of savings cannot be overlooked!
Save 3 to 12 months of expenses
To start, you want to put aside 3 to 6 months’ worth of your basic living expenses in an emergency account in the unfortunate event that you become unemployed.
And since recessions can be pretty unpredictable, aim to boost your emergency savings to 12 months of your essential expenses to have extra money if needed.
That much cash will give you ample time to find a new job. But remember, jobs can be harder to come by in an economy experiencing a recession.
Keep in mind that your basic living expenses are the essential things you need to survive; food, housing, core utilities, and transportation. Building your emergency fund is one of the most important steps when preparing for challenging financial times.
4. Recession-proof your investments with smart diversification
Ever heard the saying, don’t put all your eggs in one basket? Well, the same line of thinking applies to your investments.
It’s important to have a well-diversified investment portfolio, such as a 3 fund portfolio. That means your investments should not all be tied up in one stock or one real estate property.
You want to make sure your investments are spread across multiple industries and areas so that if one industry or area experiences a decline, one investment decision doesn’t sink your entire portfolio.
For example, if you invest in the stock market, you can spread your investments across multiple sectors such as consumer goods, healthcare, technology, etc. This is also known as broad asset allocation.
Investing with index funds and mutual funds are both great ways to diversify. You can also choose to invest in the real estate market and in small businesses.
How to invest wisely
As an investor, be sure to do your research, be clear on your investment strategy and objectives, and understand your risk tolerance. It will create less panic for you if a recession comes along.
A big mistake people make is that they start selling every investment they own when the economy dips because of emotions like fear or worry. It’s a bad idea in the long run.
If you have a clear plan for your investments and you’re in it for the long term, you are in a good place. Your investment is likely to weather a bad economy and come out on top.
Talk to a financial advisor if you have any confusion or feel stuck regarding what to do. (Find out: do I need a financial advisor?) Prepare for a recession by diversifying your investments wisely.
5. Pay off high-interest debt
The last thing you want to do is worry about having to pay off debt in a bad economy, especially with the increased rates of unemployment. When focusing on how to prepare for a recession, debt payoff should definitely be a factor.
Paying off your debt will save you a ton of money in interest payments and put you in a better financial situation. Plus, you’ll also be able to put your extra funds toward bulking up your emergency savings and other financial goals.
So, after your basic expenses are covered, as discussed earlier, you can start using your excess income to pay off debt or save.
Prioritize high-interest debt
It’s a good idea to focus on paying off your high-interest debt before you consider ramping up on investing (meaning investing more than your usual amount, though you should always invest some if you’re able to).
If you have high-interest debt the cost of your interest payments may far exceed the return on your investment.
For instance, if you have credit card debt that has a 19% interest rate, then it makes more sense to pay off that debt as soon as you can, given that the average long-term rate of return on the stock market is ~8% to 10%. Reduce credit card debt if at all possible.
Obviously, your rate of return could be much higher, but you want to avoid speculating or trying to time the market.
Once your debt is gone, you can focus on investing a higher percentage. Find out more about creating a smart debt repayment plan, like the debt snowball worksheet method, and learn how to start investing.
As a side note, if you have no other debt and your investments are on track, you might consider paying extra toward your mortgage to pay off that debt, too.
6. finance variable-rate debt to lower your risk
Interest rates typically decline during a recession. That means you may be in a good position to refinance things like mortgages or think about the pros and cons of refinancing a car.
Having a variable interest rate means that it can change over time, so getting a fixed interest rate for any debt you have is usually ideal.
Take advantage of the possibility of debt being cheaper if it makes sense for you. Remember, refinancing only applies to the debt you already have.
A recession may not be a great time to take on new debt unless it’s necessary and you’re absolutely sure you can afford it. Always have a payoff plan, no matter what.
7. Create a recession-ready budget and live below your means
Living below your means or at least within your means is the key to building wealth. It also means you eliminate having to leverage debt to live your life—no more using credit cards to pay your bills. This is where your budget comes in.
Use your budget to focus on financial security
Determine what budgeting style works best for you and learn better budgeting techniques. Your budget will help you track your expenses compared to what you earn and highlight areas you can cut back on.
Your ultimate goal should be to widen the gap between your income and expenses as much as you can. You do this by finding out how to increase your income and reduce your expenses. Spend on necessities instead of luxuries, as discussed earlier.
Any leftover money can be used to create financial security, which can primarily be achieved through saving, investing, paying off debt, and making your money work for you.
Make a plan about how much you want to save, what other income sources you can create, and how you’ll pay off debt. Then give all your attention and any spare money to those goals.
When you make progress towards your financial goals, refuse to upgrade your lifestyle. There will be time for that when you are in a better financial situation, but if you’re focused on preparing for a recession, then don’t spend on things you don’t need for now.
Continue with your plan, and you will be in a much better place with your money.
8. Find ways to create multiple streams of income
Millionaires usually have several income sources, and for good reason. Creating multiple sources of income ensures that you increase how much you have coming in, and it can increase your peace of mind during economic uncertainty.
It also acts as a buffer in case you lose a source of income. Here’s how to get started with making more money.
Start a side hustle
Is there something you’re passionate about doing? Something you do that you get complimented on all the time?
Consider starting a side hustle to generate some additional income. There are also a variety of recession-proof businesses you can consider.
For me, starting a side hustle has helped me bulk up my savings, pay off debt, and just be generally more prepared for difficult financial circumstances.
Consider passive income opportunities
Setting up passive income sources is also a smart idea. Passive real estate investing like REITs (Real Estate Investment Trusts), royalties, and selling digital products like eBooks can all be sources of passive income that can help you in tough times.
Dividend investing can also be a passive income source, as can becoming a landlord. There are many opportunities, so as you consider the resources you have, find out which ones will work for you.
9. Dual income household? Learn to live on one income and save the other
One of the savviest financial moves you can make to prepare for a recession is to shift to living on one income and saving the other. Getting frugal with your budget and reducing expenses can free up a lot of money to save for a rainy day fund.
The goal is to reduce your cost of living enough to free up the second salary altogether.
You will bulk up your emergency fund and not rely on a second income in the event of a job loss. Living below your means is the best way to prepare for the unexpected.
10. Look for recession-proof jobs or remote work opportunities
Another way to prepare as an employee is to consider recession-proof jobs. Healthcare workers, teachers, and pharmacists are types of jobs in demand even during a recession.
If you aren’t looking for a job, it’s still important to be prepared. Expanding your skills is excellent for job security, especially when it comes to wages and working remotely.
Make sure to add any new skills to your resume to stay prepared in case someone is hiring for a job you’re interested in.
Another idea for jobs is remote work. Companies are shifting towards remote positions now more than ever. Since the best work from home jobs are on the rise, you might consider applying for some or starting a home-based business.
While not every remote job is a good choice during a recession, it is helpful to have it as an option.
Expert tip: Plan for the worst, position for the best
Recessions are part of the economic cycle – we can’t avoid them, but we can prepare for them. My best advice? Don’t just hope things will stay stable. Act as if a recession is always around the corner. That means having an emergency fund, staying on top of your budget, building multiple income streams, and keeping your skills sharp in case you need to pivot.
The goal isn’t to panic, it’s to position yourself to weather uncertainty without fear. When you prepare like you’re expecting a downturn, you’re far more likely to thrive when one actually happens.
How much money do you need to survive a recession?
To prepare for a recession, most I recommend having at least 3 to 6 months’ worth of essential living expenses saved in an emergency fund. This includes housing, food, utilities, transportation, and healthcare.
If you work in a field that may be more affected by an economic downturn, or if you’re self-employed or part of a single-income household, you may want to aim for 9 to 12 months of savings to provide a greater cushion.
The goal is to avoid relying on debt while navigating financial uncertainty.
What should I buy in a recession?
When preparing for a recession, focus your spending on necessities like groceries, healthcare, and household essentials.
It’s also a smart time to invest strategically. Stocks, index funds, and real estate often go “on sale” during a downturn, so long as you’re financially secure and investing for the long term. Avoid luxury or non-essential purchases unless they’re heavily discounted and you’ve already met your savings goals.
What happens to money in the bank during a recession?
Your money in the bank remains safe during a recession as long as your financial institution is FDIC insured (up to $250,000 per depositor, per account type). However, you may notice lower interest rates on savings accounts and CDs, which is typical during economic downturns. There’s generally no need to withdraw your money unless you need to access your emergency fund.
There is generally no reason to withdraw your money from the bank during a recession, and it’s unwise to panic and take out your investments, as well.
The best thing to do is to wait it out, knowing that the economy will return to normal and your money will still be in the bank. The stock market also does well generally over time, so leaving your investments alone is a good idea.
How much money should you hold in a recession?
It’s wise to hold enough liquid cash to cover your essential expenses for at least 3 to 6 months. If you want additional peace of mind, saving up to 12 months of emergency savings is also a solid strategy. Beyond that, it’s usually better to invest excess funds to avoid losing purchasing power to inflation over time. Having too much cash sitting idle can reduce your long-term returns.
How can you make money in a recession?
There are several ways to make money during a recession. Focus on recession-resistant jobs and side hustles such as healthcare, education, home repair services, or online freelance work.
You can also sell unused items, start a low-cost business, or create passive income streams like digital products or dividend investments. The key is to look for opportunities that are in demand even during economic downturns, and build multiple income streams to strengthen your financial resilience.
In addition to this, continue to make money as usual by not quitting your day job, if possible. One of the best ideas for maximum financial security is to have a full-time job and a side hustle. The more hours you can work, the more prepared you are and the more financial wellness you have.
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Leverage these tips on how to prepare for a recession today!
While we can’t predict when a recession will happen, it makes sense to always be prepared for major life events. Apply these tips to help you make good financial decisions.
That way, you aren’t taken off guard financially, and you will have everything in place to prevent financial disaster. Trying out extreme frugal living, bulking up your savings, and creating multiple streams of income will help secure your financial wellbeing
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