The U.S. economy has seen its fair share of disruptions in the last several years. I’m sure I don’t need to remind you of the tremendous uncertainty and economic tumult that we all shared during the COVID-19 pandemic. Lockdowns, closures, and illnesses caused job loss, depleted savings accounts, shuttered businesses and widespread housing insecurity.
And even as we have gradually recovered from the pandemic, everyday Americans are grappling with the rippling effects of the rapidly transforming economic landscape. Household budgets have been strained under the weight of inflation, with costs rising in everyday items and major life purchases alike.
Speaking of major life purchases, costs in the housing market have spiraled out of control. Not only are mortgage rates and interest dramatically outpacing wage growth in the U.S., but the cost of rent in many markets has grown beyond the budget of many working class lessees.
Add to this a stock market that seems irreparably titled to the interests of the wealthiest 1%, a Federal Reserve that has raised interest rates at its most aggressive clip since the 1980s, and well-grounded anxiety over how the advent of increasingly sophisticated AI-driven technology might impact the labor market, and there are some good reasons for our shared economic discomfort.
While we haven’t experienced a true or sustained recession in the United States since the housing market collapse and the subsequent Great Recession of 2007-2008, the risk of slowdown remains clear and present. It’s true that the American economy has proven uniquely resilient among industrialized nations, with a robust capacity for capital formation even in the most unpredictable of times. And in spite of the numerous hardships faced by everyday consumers, other economic indicators such as a low unemployment rate and strong performance in the markets suggest we are on a relatively stable footing.
But given the conditions, some economists warn that this economy, no matter how resilient, is hardly recession proof. And even if the present conditions don’t yield a recession, the reality is that recessionary trends are a normal part of a long-term economic cycle. In other words, at some point in our lives, we will more than likely experience another recession.
So it’s important to take steps today to better prepare yourself for this likelihood.
For a deeper understanding of some of the macroeconomic factors contributing to our current economic condition, check out our look at how inflation is impacting everyday Americans. Otherwise, read on to find out how you can prepare for a recession.
What is a Recession?
First, it’s important to understand what a recession is…and what it isn’t. Let’s start with the latter. A recession isn’t the same as a depression. While the term carries clearly ominous overtones and real economic fallout, a recession is not as extreme an economic event. Whereas a depression refers to more than a year of sustained and severe drop in GDP, a recession is the term applied when an economy has experienced two consecutive quarters of decreasing GDP.
According to Bankrate, “The most basic definition of a recession is a sustained period of economic contraction across the economy. Simply put, the start of a recession is the point at which the economy is contracting, not growing.”
In other words, while a depression is generally a catastrophic collapse of economic functionality, a recession signals the start of declining growth. It may be a warning of yet more severe economic dysfunction, or it may merely be a natural cool down after a sustained period of rapid economic growth.
How do we, as everyday consumers, know the difference? And more importantly, how can we recognize the signs of a recession on the horizon?
Well, we can’t really do either. According to Bankrate, “Only economists on the National Bureau of Economic Research’s Business Cycle Dating Committee can declare when U.S. recessions start and end. Yet, economists often make that call more than a year after the recession has already begun. It underscores just how important it is to prepare your finances for a downturn long before any tough economic time occurs. Even better, Americans can leverage stronger economic times to button up their finances for the tougher times that inevitably always lie ahead.”
Indeed, it’s less important that you anticipate a recession and far more important that you simply take steps to be prepared at all times in the event that we do experience a downturn in growth.
Is a recession likely?
At the start of 2023, economic experts predicted that a recession was more likely than not in the coming year. With Congress engaged in a battle over an approaching U.S. debt ceiling, many consumers struggling with high interest debt and rent or mortgage payments, and a spate of regional collapses shaking the banking industry, there was good reason for concern.
According to Bankrate senior economic analyst Mark Hamrick, “Recession risks have been regarded as elevated for many months now. Those risks are seen inflamed by recent bank failures, financial instability and tightening of credit. What isn’t known is how much these hikes might hurt the job market in future months, and, by extension, Americans’ personal finances.”
However, recent months have seen improvements across several important indicators. According to analysis from Goldman Sachs, pricing in the housing market is finally beginning to stabilize, many Americans are spending disposable income again, and unemployment ticked slightly upward (hovering near pre-pandemic levels at 3.7%). That contraction may actually be a good thing, say economists, as it lowers fears of an overheating job economy (a trend which tends to feed inflation).
All of this is to say that, as of the summer of 2023, the odds of a recession in the next twelve months have gone down to 25%. That number was roughly ten points higher in the shadow of the Silicon Valley Bank Collapse from just a few months prior.
So that’s the good news. There is a catch though. According to the analysis from Goldman Sachs, the likeliest cause of a recession today is purposeful action by the Federal Reserve. An intentionally triggered recession happens to be one of the weapons in the Federal Reserve’s arsenal against inflation.
Goldman Sachs notes that “Our economists forecast annual average growth this year of 1.8%, which is well above the consensus of private-sector economists and projections from the U.S. Federal Reserve. A critical question is whether the Fed will have to generate a recession to bring inflation back to its target of 2%: The key issue to watch is whether the labor market is able to rebalance smoothly, according to Goldman Sachs Research. ‘Most of the news in this regard has been positive’.”
Ok. So what’s the takeaway? Not even the experts are totally sure if or when a recession will actually strike.
9 Tips On How to Prepare for a Recession
You may not be able to predict the arrival of a recession. And you certainly can’t do anything to prevent it. So the best thing you can do is prepare yourself by taking these nine steps.
1. Assess Your Overall Financial Outlook
The very first step is getting a complete understanding of your financial outlook. Do you have savings accounts, retirement funds, investment accounts, and other assets? Do you own or rent? What do you spend on your monthly bills? What about discretionary spending?
Take a complete inventory of your income, savings, spending, and more. Bankrate advises that you “Write down every financial firm you regularly work with, whom you regularly pay a bill to and how much it is. See how much cash you have available right now, whether in a checking or savings account. Find out the categories where you spend money most. It’s always a good idea to go through your monthly expenses and identify which items are discretionary — services or items you can live without — and which items are a necessity. Consider also tracking your pay stubs, so you know how much money you have coming in each month.”
The benefits of compiling and keeping this information on hand are numerous. First and foremost, you can see exactly how much you have in the way of financial resources in the event of a sudden loss of income. As you’ll see through the subsequent steps, this is important foundational knowledge when it comes to recession prep.
It’s also beneficial to compile the names and contacts of your various financial institutions in the event of hardship. Familiarize yourself with any assistance or forbearance programs that might be to your benefit in the event of a financial downturn. And perhaps most importantly, when you see exactly how your money is being earned, saved, and spent, you’ll also be able to see places where you might be able to make some financially savvy changes.
2. Categorize Your Expenses
Indeed, as you put together a full picture of your financial health, you’ll begin to distinguish essential expenses like rent or mortgage, utilities, and groceries from discretionary spending on entertainment, dining out, subscription services, consumer goods, and more.
You’ll immediately begin to identify areas of spending that are nonessential. Naturally, in the event of a recession, these areas represent opportunities to reduce your spending. Categorizing this optional spending now can make it easier to make those cuts to your expenses in quick order.
But of course, you don’t have to wait for a recession to improve your spending habits. In fact, you shouldn’t wait for a recession. Economic research says the best time to prepare yourself for economic hardship is during times of economic health. Find ways to cut down on your discretionary expenses today, and you’ll find adjustment and survival more manageable in the face of economic contraction.
To be clear though, we’re not suggesting you should cut out all the fun. Just budget that fun consciously and responsibly. For tips on how, check out our article on putting aside a budget for recreation.
3. Create a Budget
Speaking of budgets, creating one is perhaps the single most important step you can take both in preparing for a recession and for more generally improving your own financial health and outlook. Indeed, preparing for a recession means learning how to control your spending today. But you must understand how you actually spend money before you have a chance to adapt your habits.
This includes your expenses but should also take into account your savings and retirement goals, your income, your assets, and all the other data you compiled when completed Tip #1 above.
According to Ramsey Solutions, you can “Start by listing out all your sources of income and subtract your monthly expenses…You want to make sure you’re able to cover the basics (food, utilities, rent and gas). If not, see what spending you can cut to get more breathing room in your budget.”
Only after you create a comprehensive budget can you truly understand the balance between your earnings, your savings, and your spending. If you’re not sure where to get started, we’ve highlighted a bunch of easy to use and super helpful budgeting apps. Take a look at our list and get a little bit of help getting your finances in order. Know where every dollar is going today. If a recession hits, that knowledge will be critical to making financially savvy decisions.
4. Have a Financial Plan
Once you get a better look at your current financial outlook, you can begin to make some moves for the future. What do you want your financial outlook to be?
The time to begin building toward your retirement, pursuing your savings goals, and securing both your short- and long-term future is before a recession strikes. You may find it far more difficult to take these steps in the event of an unexpected job loss, a significant decline in income, or even just economic uncertainty as you near the end of your career
Take steps today in anticipation of potential economic turmoil by building a plan to meet your personal finance goals. To this end, Fidelity advises “It can be a balancing act, saving and investing for the distant future while also taking steps to protect what you have today. Consider thinking about your financial picture in terms of 3 broad categories: preparing for emergencies, protection, and growth potential. These 3 building blocks work together to help make sure you have money for unexpected expenses, a plan to protect what you have, and growth potential to reach your long-term goals.”
Creating and sticking to your plan is important not just in anticipation of a recession, but in the event that a recession does actually occur.
5. Stay the Course On Your Investment Strategy
Indeed, one mistake that many people make in the face of a recession is to immediately draw down the amount dispersed to investment, retirement and savings accounts. And in one respect, it’s only natural, and sometimes necessary, to focus strictly on affording essential expenses when money gets tight.
But it’s important to remain focused on your long term goals. Remember, a recession is not a depression. In most cases, this economic downturn will be temporary. Weather the storm and do your best to avoid being derailed from your savings goals.
According to Ramsey Solutions, “When the stock market is trending down, you might be tempted to sell your mutual funds at a loss and put the money into something safer to weather the storm. But hold on, take a deep breath, and don’t let fear cause you to make a costly mistake.”
Beyond taking you off course of the all-important plan we mentioned in the previous section, that costly mistake can come in the form of heavy fees and tax penalties for early withdrawal.
But remember–we’ve taken the time to identify all of our expenses, and to create a well structured budget. Use this information to make smart decisions about where to cut spending. There are ways to offset your monthly expenses during an economic downturn, but your investments should be among them.
6. Build Your Emergency Fund
In fact, one great way to avoid the need to dig into your savings account or retirement fund during a recession is to start building your emergency savings as soon as possible. Open a high yield savings account and make modest automatic withdrawals from your spending account at regular increments. For instance, two partners automatically withdrawing $10 once a week into an emergency fund would accrue $1000 in a single year without feeling much of an impact on day to day expenses.
But when should you use this emergency savings supply? Equifax advises, “While tapping into your emergency fund is never a decision you should make lightly, losing a job or being forced to live on a reduced salary certainly qualifies as a good reason to use some of the cash you’ve put away. However, it’s important to rebuild your emergency fund as soon as your financial situation is more stable. Otherwise, when the next emergency hits, you might have to make tough decisions, like withdrawing money from your retirement account or applying for a home equity line of credit.”
In other words, you should always include space in your budget to make incremental additions to your emergency fund, even in times that call for the use of this fund.
7. Eliminate Credit Card Debt
Part of preparing for a recession is taking steps in advance to reduce spending in your monthly budget. If you have student loan debt, credit card debt, or debt from personal loans, you’ll want to take aggressive steps to eliminate these debts. If you’re struggling with large balances and high interest rates, you should consider working with your lenders to establish a debt payoff plan.
The more aggressively you work today to chip away at that debt, the lower your expenses will be in the event of a recession. Not only will this take a major expense off of your plate, but it will clear up your credit card balances in the event that you require their use for a financial emergency. While we don’t advise leaning on credit spending in order to survive a sustained period of economic downturn, we do advise having these credit cards at your ready disposal in case something unexpected requires a large and immediate source of money.
8. Always Be Ready for the Job Hunt
Speaking of something unexpected, the largest fear that most Americans grapple with in times of recession is job loss. When economies retract, companies lay off employees, small businesses close, and economic activity diminishes in the freelance and gig economies. So it’s absolutely true that job security is a top concern when recession does strike
So one of the best things you can do to be ready for a recession is to keep yourself in prime interview condition. What we mean to say is, you never know when you might need (or want) to pivot to a new position, company, or even career path. Always be ready with an updated resume and a list of contacts, should this moment be thrust upon you.
According to credit bureau Equifax, it may “help to update your resume and other job-hunting tools ahead of time. As you review your past work experience, look for any gaps. Are there places where you could pursue continuing education or additional training? Expanding your skill set is one of the best ways to invest in yourself as an employee. This is true even if you’re able to keep your position during a recession.”
If you are thinking about making this pivot, you can start by checking out these 10 Recession proof jobs.
9. Don’t Panic
We’ve offered a number of practical tips on how to prepare for a recession, but we also recognize that a recession can carry a heavy emotional toll on people and households. Economic uncertainty brings fear and anxiety.
But it’s important not to panic at the first utterance of the word recession. As we’ve said from the outset, recessions are sometimes inevitable, and perhaps even necessary in order to stave off bigger economic catastrophes like hyperinflation and depression. Of course, that doesn’t mean navigating a recession is easy.
However, recessions are typically temporary. So instead of panicking, be prepared. If you take the steps outlined above, you should be equipped to survive the storm.
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And once again, if you’re thinking about jumping ship for a role with better job security, check out another 10 recession proof jobs.