How To Prepare For A Recession: 10 Must-Do Steps

how to prepare for a recession

Find out more about creating a smart debt repayment plan, like the debt snowball worksheet method, and learn how to start investing. 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. For example, if you invest in the stock market, you can spread your investments across multiple sectors such as consumer goods, healthcare, technology, etc. But remember, jobs can be harder to come by in an economy experiencing a recession.

how to prepare for a recession

Invest time in creating an ebook, online course, or blog on a skill that you’ve mastered and could use to earn passive income. Directly deposit your side hustle earnings into your savings account for an extra financial cushion. Plus, being debt-free gives you an overwhelming sense of freedom and peace. And when you aren’t spending most of your paycheck on debt payments, things like higher grocery prices—or a dip in the stock market—won’t hurt as much. The best thing to do during a recession is not to panic and focus on your long-term financial goals.

What happens to money you have in the bank during a recession?

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. Whether a recession is approaching or not, there are ways to plan your budget for any economic changes. Building your savings, re-evaluating investments, and managing debts are key opportunities to get ahead of any unexpected events. With federal interest rates on the rise, some people might feel like we’re heading into a recession. But the unemployment rate is still relatively low, inflation seems to be leveling out, and the stock market is trending up.

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. Whether your investments are doing well or not, avoid making emotional money decisions. If the market takes a turn for the worse, consider riding it out for any upswings.

This includes how it’s delivered, or how it’s priced, in order to cater to customers’ needs that might change during a recession. You can vary the packaging sizes, offer services online, and more. Whether things are heading towards a recession or not, you should consider business models that can supplement your income. Look towards products and services that are underserved in the market which you can fill with ease. Look towards technology to give you that additional edge such as opening an online store and drop shipping. While it would be wonderful if the Canadian and U.S. economies avoided a full-blown recession in the months ahead, I think it’s wise to plan for the worst-case scenario.

It’s all about weighing your current priorities with your long-term goals. That means now is the best possible time to prepare your money. Think out of the box on ways to save your organization money or make more of it. In a survey of retirees in 2022, 13% reported that an IRA was a significant source of their income, and 33% said it was a minor source. Work-sponsored retirement plans (such as a 401k) were a major source for 12% of retirees and a minor source for 24%.

The first method is known as the debt avalanche and will save you more money in the long run. The second is called the debt snowball, and it focuses more on getting quick wins, which motivates you to keep going. Search for Fund Fact documents for all Fidelity mutual funds or ETFs. Plan your savings — whether for education, retirement, or every moment in between. Explore the wide spectrum of available Fidelity mutual funds across different regions, sectors and asset classes. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

“Historically, since 1957, when the S&P 500 was created, the market has been returning close to 10% yearly on average. The market is going to go up and we will see downturns over time, But, in times like today, the market is on sale. It’s a great opportunity to consider investing more in good companies with a long-term strategy because you’re buying the stocks at a lower cost basis,” Marc Russell told me. If you’re planning to stay in your current home, build up your savings to protect yourself in case you’re laid off or your hours are reduced. NerdWallet’s guideline is to eventually build up to three to six months’ worth of expenses. It’s OK to start with smaller goals and build over time; research shows even $500 can be enough to insulate from the most common financial shocks.

Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Then, put that surplus money to work strengthening your financial safety net. Ryan Phillips, CFP, founder of GuidePoint Financial Planning in Reston, Virginia, encourages clients not to overextend themselves during the good times.

How to prepare for a recession: plan ahead to survive and thrive

A recession is an economic downturn that occurs over a period of time where unemployment rises, and trade and industrial activity decline. While it can vary, a recession typically refers to six or more consecutive months of economic decline. This means a country’s gross domestic product (GDP) declines for two back-to-back quarters, signaling slower or negative economic growth. If you don’t have extra money set aside in an emergency fund, it means you’re not well prepared to deal with unexpected expenses. Emergencies can include something small, like a minor car repair, or something as significant as a job loss. Before you can begin to make changes to your finances, you need to know where you stand.

  • As an investor, be sure to do your research, be clear on your investment strategy and objectives, and understand how risk averse you are.
  • 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.
  • This information is for general knowledge only and should not be interpreted as tax advice or recommendations.
  • “I’m preparing mentally and emotionally, but there’s very little new activity happening,” says Richner, who lives in Columbus, Ohio.
  • 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.

Make the investments that you can afford after you pay your bills, of course. 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. 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.

Try to stay the course with your investments

This includes checking how much money you have in short-term savings and your debt levels, especially things like credit cards or other high-interest debt. Keep your emergency fund in a separate savings account that’s easily accessible, so it doesn’t get mixed up with the rest of your money. Use the estimation of monthly expenses you made above to get an idea of how much you’d need and think about other ways you might keep your head above water in an emergency. The amount of money you should hold in a recession in cash is whatever amount you have for your emergency fund. 3 to 6 months of savings is the commonly accepted amount, and it will likely be enough to help you get through difficult times during a recession. The best thing to do during a recession is to wait it out, knowing that the economy will return to normal and your money will still be in the bank.

  • Debt is a bad decision—even when you’ve lost a job, even when you’re scared, and even in a recession.
  • The U.S. economy will continue to go up and down, just like it always has.
  • The sooner you learn to live on less than you make (and avoid debt), the more prepared you’ll be in times of crisis—whether that’s a recession, a job loss, or another emergency.
  • You can rent out those properties to get a steady stream of income while riding out the recession.

It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. Another thing to bear in mind is that interest rates are climbing, making it more costly to carry debt.

Keep calm and invest on

The finding is at odds with the optimism that’s permeated U.S. equity markets for most of the summer, as cooling inflation and low unemployment bolstered hopes for a so-called soft landing. Another 21% said the reversal will happen even sooner, in the last quarter of this year, as high borrowing costs eat into household budgets while COVID-era savings run down. The stagnation in the price action is partly because of the strength of the U.S. dollar and the market’s interest rate expectations. But the macro data the market is basing its estimates on looks manipulated or flawed by design, according to Lee.

Ideally, you should try to save enough to cover 3 to 6 months of essential expenses. Don’t worry if your emergency fund isn’t quite up to that standard; 3 months’ worth of essential expenses is quite a lot of money to squirrel away. Get the ball rolling by saving $1,000 or one month’s worth of essentials and then keep going until you’ve hit a level that helps you feel secure. And if you’ve been relying on credit cards to make ends meet, it’s time to nip that habit in the bud! The sooner you learn to live on less than you make (and avoid debt), the more prepared you’ll be in times of crisis—whether that’s a recession, a job loss, or another emergency.

Many people are worried about a looming recession, and it’s easy to see why. Rising inflation, spiking consumer prices, supply-chain issues, instability in the global market, and labor shortages all have many financial experts saying that another recession is around the corner. The NBER doesn’t issue a red “Don’t Panic” button with the declaration of a recession, but they probably should. The reality is that most people won’t lose their jobs, portfolios will likely recover and a recession won’t last forever. Luckily, by adding a small amount to your savings account each month, you can mitigate that risk and give yourself the time to wait for a job that’s a good fit rather than accepting the first one that comes along. At the same time, he said, having a financial cushion in case of job loss is always a good idea regardless of what’s going on in the broader economy.

But even if you’re happy with your current job situation, it’s always a good idea to keep your resume updated. It may be hard to save on necessities in categories where inflation has caused prices to rise dramatically. But any debt that has an interest rate in the double digits or has a variable rate is worth day trading tips trying to get off your plate as soon as possible. “Credit cards have variable rates that are already going up,” warns Jay Zigmont, a CFP and founder of financial advising firm Live, Learn, Plan based in Water Valley, Mississippi. You may not be able to fully protect yourself from the impact of a recession.

“I’m preparing mentally and emotionally, but there’s very little new activity happening,” says Richner, who lives in Columbus, Ohio. Try to put aside just enough so you can scrape by on a strictly bare-bones budget for three months in case you lose your job, said Brian Robinson, a financial adviser and partner with SharpePoint. Companies are shrinking due to not being prepared for their future. Supply chain disruptions have led to shortages of raw materials and components, forcing many manufacturers to cut production. I have a client that manufactures tools overseas but did not have a plan in place to face supply chain issues. Although the pandemic was a big part of the problem, the company did not adequately address its issues for the short or long term.

You also don’t have to scour the headlines to see where each industry is headed. Powered by artificial intelligence (AI) technology, does this work for you. It bundles investments from various sectors so you can automatically put your money in a diversified group of assets. While this might sound painful, cutting your spending doesn’t have to mean eliminating all pleasures. Some of the most effective ways to save are to check for money leaking away in the form of subscriptions you don’t use or shop around for insurance and cell phone providers.

There’s no guarantee that home prices will fall, but runaway price increases are expected to slow to a walk. The National Association of Realtors forecasts that year-over-year existing home prices will rise 4% in the first quarter of 2023, down from 15.3% in the first quarter of 2022. Our partners cannot pay us to guarantee favorable reviews of their products or services. Just so we’re clear, a recession means the gross domestic product (GDP) has been down for two quarters in a row. But it’s not officially a recession until the National Bureau of Economic Research says it is—and they haven’t yet.

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. Before you start to make a plan for a recession, consider what your finances look like right now. Recessions can be an emotional and stressful time, especially when it comes to your investments.

Before we discuss the solutions, we must understand the problems that recessions cause. Several dangers are inherent to a recession and threaten your financial stability. So, if you’re like me and have a bunch of old courses sitting in your inbox, go through them, and see what’s relevant and which skills you can build upon. There are plenty of other websites where you can sell your used goods for cash like books, clothes, and phones. If you have extra space in your home, house hacking can boost your income while reducing household expenses. On average, a recession happens every six years and typically lasts ten months.

“This default wave will lead us to this next recession. I see lending getting tighter and capital getting restricted in the economy so that the default wave begins,” he said. Investing during a recession can be a tricky experience, as the market can be highly volatile. The key here is to stay focused on your long-term plan and the better days ahead once the market turns around. An important piece of advice to remember is to keep your emotions from influencing your financial decision-making.

But bolstering your finances when you have the money to do so can soften the blow when a downturn develops. “Each recession is a little different, but history has a way of repeating itself,” he says. “I always remind my clients not to think in terms of ‘this time is different’,” and he discourages them from trying to time the market. “[Fixed-rate] debt is anchored to inflation when it wasn’t high, but your other expenses are higher. It’s a little bit of a steal to pay down your debt in this context,” Zimmerman said.

“You are taking assets that are simply depreciating in value to make a buck and clean your house at the same time,” Zimmerman said. “A lot of folks have a lot of stuff sitting around, and if you have something of value, you can almost always sell it.” “This is the time for a part-time job or a hobby you want to turn into something more. There is a ton of value in having multiple income streams when there is uncertainty,” Zimmerman said. If you want to invest in sectors more resistant to recessions, gold and commodities like alcohol tend to be relatively safe, according to Zimmerman. Loans with fixed interest rates, like student debt or mortgages, are typically less onerous. Make a spreadsheet of your spending or use a budgeting program like Mint to organize and reduce your recurring costs.

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