Although no one can predict exactly when a recession will start or end, they’ve historically been a normal part of the economic cycle. And because recessions often impact people’s finances, ensuring your finances are in shape is always a good move—no matter what stage of the cycle we're in.
The highlights:
- A recession is a slowdown in broader economic activity that can affect your personal finances.
- While nobody can predict exactly when or how the next economic downturn will begin, you can take steps to prepare your personal finances for a recession.
- By creating a budget, saving for emergencies, and making a plan to pay down debt, you can build up your financial confidence.
What is a recession, exactly?
The U.S. economy has always experienced periods of growth followed by periods of decline.Disclosure 1 Sometimes, these periods of decline lead us into what’s known as a recession.
Although experts sometimes take different points of view on what makes a recession, one of the most common definitions is two consecutive quarters of a decline in gross domestic product or “GDP”—a measure of the value added through a country’s production of goods and services.
In a recession, you might face reduced job security and short-term losses in your retirement accounts as companies cut spending and the stock market goes through a down period. Many people tighten their budgets during recessions so they can be better prepared for different financial scenarios, like a loss of income or spending power.
You can’t predict or control the economic factors that may lead to a recession—but that’s OK. Instead, focus on what you can control by taking proactive steps to prepare your personal finances.
These tips can help you feel more confident and ready for any future downturns.
1. Create a monthly budget—and commit to it.
A budget can help you manage your living expenses so you can save more for emergencies, pay down debt, and set realistic goals for your future. One of the keys to reaching your goals is to spend less than you earn, and a budget can help you stay on track.
During a recession, it might become more challenging to stick to your usual budget. For example, if your income goes down, you may want to spend more time looking for deals or discounts. You may also want to reduce discretionary spending—meaning the money you spend on your wants vs. your needs.
One of the best ways to recession-proof your finances is to simply have a budget that you review regularly. Budgeting when times are good can help you save and prepare for the unforeseen—and adjusting your budget when there’s a downturn can help you make it through. (Just remember that it’s still OK to buy that cup of coffee if it brings you joy. Finding small ways to treat yourself can be worth it for your well-being.)
2. Build up your emergency savings fund.
Consider this your financial safety net—it helps you prepare for the unexpected, whether that’s a loss of income or an emergency medical bill. If you haven’t started one yet, set an initial goal of growing $1,000 in a savings account and set it aside for true emergencies.
Once you accomplish this, work toward saving three to six months of expenses in the account. That can help you get through any financial challenge. Our emergency savings calculator can help you determine how much to set aside.
3. Make a plan to pay down debt.
Paying down debt can give you more spending (and saving) power—which may help you stress less and find more happiness. Less debt, more savings, and a positive mindset can make a big difference during a recession.
Your debt payment plan is all about priorities—and it depends on your personal circ*mstances. There are two common approaches:
- “Snowball”: With this method, you pay off your smallest debts first while making the minimum payments on the rest. Then, work your way up to paying off the bigger ones. If you get motivated by racking up small wins, this may be the right move for you.
- “Avalanche”: If you take this strategy, you make all your minimum payments, but then spend the rest of what you’ve budgeted for debt repayment on the debt with the highest interest. If you have a lot of high-interest debt—from credit cards or payday loans, for example—this approach can help you save more money long-term than the “snowball” method.
Our debt versus savings calculator can help you determine where to put your money to have the most impact. It may feel challenging at first, but you can build an emergency savings fund and tackle your debt at the same time.
4. Invest in yourself and boost your earning power.
Evidence shows that more educated workers fare better during recessions. During the recession that followed the 2008 financial crisis, the unemployment rate for people with a high school education was double that of workers with a bachelor’s degree or higher.Disclosure 2 But an advanced degree or certificate isn’t the only way to invest in yourself and prepare for a recession.
A few other possibilities include:
- Freshen up your resume and look for new and better-paying opportunities.
- Talk with your manager about getting a raise or promotion.
- Start a side hustle or search for a part-time job that can contribute to your money goals or expand your skills.
Going back to school can be expensive but can sometimes be the best way to reach your career or income goals. Consider factors like your financial situation—including your outstanding debt and your willingness to take on more—before making a decision. Be sure to compare your different options for continuing education, too. If grad school isn’t right or feasible for you, there may be online certifications in your field that you could pursue at a more affordable cost.
Investing in yourself can help you over the course of your lifetime—not just during periods of economic turbulence. You can take steps now to give yourself peace of mind and financial resilience in the future, regardless of whether the economy is up or down.
Next steps:
- Start building your monthly budget and check out these tips that can help you “live within your means.”
- Calculate how much you can start putting toward your emergency savings while still paying down debt.
- If you don’t already have a savings account for your emergency fund, consider opening one and keeping it separate from the rest of your money.
