The word recession is often thrown around on the nightly news and in the papers, but what exactly does it mean? Simply put, a recession is a period of decline in economic activity that lasts at least a few months. Some of the more visible signs of a recession are a plunging stock market and sharply rising unemployment.
If you’re dependent on a job for income—as most of us are—or close to retirement, then the idea of losing your job or seeing your life’s savings take a nose-dive can be a major source of stress, especially since recessions are so hard to predict.
Since 2000, we’ve had three recessions in the United States: the bursting of the 2001 dot-com bubble, the 2009 Great Recession caused by the housing crisis, and the 2020 COVID-19 recession. That generally fits the pattern of once every seven to 10 years, which makes us theoretically due for another downturn sometime before the end of this decade.
If you’re like our family, you don’t necessarily dream of being rich, but you hope someday to reach a point where you don’t have to worry about money or unexpected misfortunes. You would like to sleep well at night knowing that you will make it through to the other side and be able to focus your energy on the more important things in life, like relationships.
5 Ways to Prepare for a Recession
What can you do today to prepare for the inevitable next recession and make it a less stressful event? Thankfully, there are several small changes you can start making right now, each of which will leave you more resilient, no matter what happens in the future. Even if you don’t lose your job or have substantial investments in the stock market, you’ll have greater financial flexibility to navigate and more options than you otherwise would have had.
1. Build a 3 to 6 Month Cash Cushion
Cash is the ultimate safety net during recessions. If your income gets cut off and your investments are down, you’ll need cash on hand to keep the lights on and make sure your family is fed. One-income families should aim for at least six months in savings, while dual-income families might opt for three months because of the lower risk of losing both jobs at once.
The number you’re aiming for is three to six months of your actual expenses, not necessarily your income. It’s best to keep this money readily accessible—a high-interest savings account is perfect.
2. Lower Your Monthly Expenses
The simplest way to lower your financial risk is to lower your expenses, especially those that can’t be easily trimmed back during a crisis. It’s easy to stop eating out or opt for less expensive foods if necessary, but you can’t quickly pay off a large mortgage or car payment if you need to save money immediately. By focusing on flexibility in this way, you can easily adapt your lifestyle to any financial environment without too much stress.
3. Pay Down Higher Interest Debt
One of the worst things you can bring into a recession is a large debt balance, especially high-interest debt such as with credit cards. Not only will you be saddled with principal and interest payments when you may not have the money, but these lines of credit also represent an important lifeline if you are ever in desperate need of money. By having them tapped out during good times, you’re asking for trouble when hard times arrive.
4. Review Your Investments per Risk Tolerance
You may have money invested in the stock market for retirement or just for future use. Many people nowadays like to invest and manage their own money in apps such as Robinhood. However, what isn’t always taken into account is how soon you may need that money, and whether you’re emotionally able to ride out the ups and downs of performance.
The worst-case scenario is having to pull your money out when it’s at its lowest, because then you are permanently “locking in” your losses. If you think that could happen to you, consider adding lower-risk options to your portfolio, such as CDs, bonds, and treasuries, that grow more slowly but with less risk of volatility.
5. Diversify Your Income Streams
For most people, the single most significant financial risk they carry is depending on a single source of income. If you lose that one job in a down economy, there’s no real backup plan until a new one is found.
While having several months of cash savings is a good way to buffer risk, there is another way that multiplies your resiliency: Try to cultivate another source of income. Even small sources of side income could be a lifesaver if you lose your job. You’ll burn through your savings much more slowly, and you may even be able to pivot more time into the side job until you find a replacement.
Besides these sound financial strategies, one of my favorite pieces of financial advice is to embed yourself in a strong community of people who care for each other. Of course, you won’t do this for the money, but in the real world, truly close friends and families help each other out all the time when the going gets tough.
It’s best not to assume we will always be independent and to ask for help when we need it. Our loved ones often feel blessed themselves by having the opportunity to help.
