How to Prepare for the Next Recession

Published on July 3, 2020 by Daniel Azzoli

smiling man looking up tips online to help him prepare for the next recession

Are your personal finances ready to weather a recession? If not, it may be a good idea to start preparing for something like this.

While this may seem like an impossible task, we’re here to tell you it is possible to equip your finances. Our guide touches on some ideas and answers questions, including how much you should save in an emergency fund and what is a personal line of credit’s role in all this.

No matter what happens, try to keep calm and follow the tips below. Here’s how to prepare for the next recession.

What is a Recession?

A recession is a complicated thing, so we turn to the experts at the National Bureau of Economic Research (NBER), a non-profit organization dedicated to conducting economic research. It’s the official arbiter of economic peaks and troughs, so they know what they’re talking about.

The NBER defines a recession as the following:

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.[1]

What Does a Recession Mean for You?

Now with the official textbook definition out of the way, let’s focus on the real-world effects a recession might have in your life.

A recession sets off a chain reaction in the economy.

As retail sales and production levels drop, people may lose their jobs. Without a stable income, many people can’t buy as much or as often. They may struggle to pay their regular bills, or even rent.

A nation without expendable cash delivers a second blow to the markets. Demand plummets when fewer people buy things, so, many businesses end up closing and laying off more people.

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How Do You Prepare for a Recession?

The effects of a recession range greatly. Some people barely feel the crunch, while others are significantly affected.

Your experience may depend on what industry you work in. Some essential workers are bound to keep their jobs while retail workers may be the first to be laid off.

It also has to do with the state of your finances before a recession hits. If you’re struggling to pay bills now, it may not get any easier unless you change your financial habits.

Let’s take a look at some techniques that may help your financial situation during a recession.

1. Create an Emergency Fund

An emergency fund is a specialized savings account you pack with money for a rainy day. You can access this cash if things go wrong — whether it’s an unexpected auto repair or medical expense.

Depending on its size, it may also help you weather a more serious recession.

The golden rule of emergency funds is saving anywhere between three to six months’ worth of expenses in this fund. But not all financial advisors agree. Some, like David Bach and Suze Orman suggest upping your fund to cover as much as one years’ worth of expenses.[2] [3]

Whether you opt for three or 12 months is up to you. Consider your risk tolerance, then decide on whatever goal makes you feel the most secure while preparing for a recession.

Are you on track?

If you’re far from saving what you need, you’re not alone; only 40 percent of Americans could pay an unexpected $1,000 expense.[4]

To kickstart your emergency fund into gear, sit down with your budget so you can squirrel away some cash with each paycheck.

The 50-30-20 Budget recommends saving as much as 20 percent of your income after taxes.[5] This amount covers emergency fund contributions, debt payments, and future goals.

2. Trim the Fat

Spending more than you earn is never a good idea, but it’s especially untenable during a recession.

When a recession hits, lean and mean is the motto for your budget. You’ll want to strip your spending down to the bare essentials that you have to pay.

Cutting back on your expenses is a good idea while you’re preparing for a recession, too. It helps you meet your savings target, freeing up more cash at hand to help in an emergency.

What Stays and What Goes?

If you aren’t sure how to scale back, sit down with your budget, and separate your spending into two major categories: needs and wants.

Needs: These expenses cover the essentials, like housing, healthcare, utilities, and groceries. If you genuinely can’t live without it safely, it’s likely a need.

Wants: Wants, or discretionary spending, cover all the fun things in life, like concerts, getaway trips, subscription services, and takeout. While you might miss them, you don’t need them to live.

Your wants are the easiest things to cut back on, so focus on those first. Try cutting them in half or eliminating them entirely to free up more cash.

3. Pay off Debt

Debt may be a difficult burden to carry around while dealing with a recession. It can make an already tough situation worse.

Whether it’s a personal line of credit or unsecured loan — two products featured in our glossary of useful financial terms — these payments eat into your monthly cash flow.

You may be able to afford your personal loan or line of credit or credit card payments now. But you may struggle to keep up with them if you lose part or all of your income.

It may be easier to endure a recession if you don’t have to make payments against your debt. That’s why you should always make sure to set aside cash for debt reduction in your budget.

4. Boost Your Income

Between your fixed bills, savings, and debt reduction, your paycheck may be stretched thin. If you’re finding it hard to hit your targets while preparing for a recession, consider how you might increase your earnings as it may help to give your finances more breathing room.

Padding out your paycheck isn’t always easy, so here are some ideas to help you increase your earning potential.

  • Learn New Skills. Take free classes, upgrade certificates, and volunteer to increase your skill set. Adding this to your resume may make you qualified for higher-paying jobs, or it may help you negotiate for a raise at your current place of employment.
  • Market Your Hobbies. Depending on your hobbies, there might be a market for your skills — whether you’re a baker, candlestick maker, or a keen data analyst. Go online to see if you can find freelance gigs using what you know.
  • Get a Second Job. If you have the time, consider applying for a more traditional part-time job you can work during the evenings and weekends.
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It may be tempting to celebrate with the cash you earn here but remember you’re preparing for a recession. Split any extra cash you earn between savings and paying down your debt, such as line of credit or credit card bills.

5. Monitor Your Credit History

It’s always a good idea to monitor your credit report. This report is a litmus test for your finances. It shows how well you’ve managed a personal loan or line of credit in the past, so it may influence how easily you can borrow money in the future.

People with bad credit may face more challenges when looking for loans, but it may still be possible if you consider short term loans.

An additional benefit of short term loans is that they’re designed as a safety net in case you face an unexpected emergency expense when your savings are low.

Before applying for a short term loan, take some time to read how a CreditFresh line of credit works to find out if it’s the right fit in an emergency.

6. Research Your Investing Options

Good money management requires a long-term view of your financial needs and goals. Beyond building an emergency fund, you may be also investing in your child’s education or your retirement.

Many long-term investments rely on the stock market, and the stock market tends to plummet during a recession.

With your future on the line, you may be tempted to halt your investments or withdraw them entirely. But think twice about this strategy.

Keep in mind that it may cost money to remove funds early from certain investments. For example, both a 529 College Savings Plan and 401(k) may levy tax penalties if you withdraw before a specific time.[6]   [7]

Make sure to do your research to see what works best for your finances.

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Don’t Wait, Start Preparing Your Finances Today

No matter what happens, finding out how to prepare for the next recession starts with today. How you manage your finances now will have a huge impact on how they fare when the economy turns.

How are they doing? If you’re living beyond your means or ignoring debt, now is the time to break out of these bad habits. Focus on your budget and make a plan to pay down your debt and set aside cash in savings.

Unfortunately, life, like the stock markets, isn’t always predictable. If your plans go haywire, don’t freak out. Find out more about our services and the rates to see how they might help you in an unexpected emergency.

Managing a recession is like sailing on choppy seas. It may be tough, but the more prepared you are, the better you’ll be able to weather this storm.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use. 


[1] https://www.nber.org/cycles/jan08bcdc_memo.html

[2] https://www.cnbc.com/2018/11/01/david-bach-heres-how-much-money-you-need-in-your-emergency-fund.html

[3] https://www.cnbc.com/2018/06/13/how-much-money-suze-orman-says-to-have-in-your-emergency-fund.html

[4] https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-to-cover-a-1000-emergency.html

[5] https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

[6] https://www.investopedia.com/ask/answers/101314/how-do-you-withdraw-money-your-401k.asp

[7] https://www.fool.com/knowledge-center/penalty-for-early-withdrawal-from-529-plans.aspx