7 Ways to Prepare for a Recession

Since the ugly aftermath of the Great Recession of 2008 and the economic turmoil spurred by the COVID-19 pandemic, the word recession strikes fear in the hearts of many. Recession is a term that describes a period of economic decline, usually characterized by a decrease in Gross Domestic Product (GDP), rising unemployment and a drop in the stock market.

Recessions are a normal stage of the economic cycle. Still, they can be challenging for individuals and businesses alike due to things like job losses, tightening of credit markets, housing market decline and stock market volatility—but the good news is you won’t need to worry as much if you’re prepared for the worst.

Mountain America Credit Union is here to guide you through the market’s ups and downs with reliable advice along your journey to better financial health. In this blog, we will explore how to prepare for a recession in seven ways so you can weather the storm and emerge financially stable on the other side.

What is a Recession?

Before we dive into the ways to prepare for a recession, let's pinpoint what a recession is in slightly greater detail.

• During a recession, there is a major decline in economic activity that lasts for months and negatively impacts real GDP, income, employment, industrial production and wholesale and retail sales. It typically results from a decline in the demand for goods and services, often caused by a drop in consumer spending, government spending or business investments.

• Recessions are natural and occur for various reasons, including monetary policy changes, stock market crashes, unexpected natural disasters, pandemics or wars. While they’re normal every so often, they’re also difficult to predict and can vary in levels of severity based on factors like the cause and length of the recession and the response of policymakers.

• The severity of a recession can also depend on the level of debt in the economy before the recession. If households and businesses have high debt levels, the recession may be more profound and prolonged as people struggle to pay off their debt and reduce spending.

What Happens During a recession?

During a recession, the economy experiences a significant decline in various aspects, leading to several pain points. Here are some of the major things that happen in a recession:

• Job losses: As businesses struggle to stay afloat, they may be forced to cut costs by reducing their workforce.

• Decreased consumer spending: People who have lost or fear losing their jobs will reduce spending. This decrease in spending can lead to further job losses and business closures, creating a vicious cycle.

• Housing market decline: During a recession, the housing market typically takes a hit, leading to lower home values and increased foreclosures.

• Stock market volatility: The stock market is often volatile during a recession, causing many people to lose money in their investments.

• Tightened credit markets: Banks and other lenders may hesitate to lend money during a recession, leading to tightened credit markets. This can make it challenging for businesses to secure financing to grow their operations, leading to further economic decline.

Even though you can’t control the events in the broader economy, you can prepare yourself and your family for whatever financial blowback a recession may cause.

How to prepare for a recession

While recessions can be challenging to navigate, there are steps you can take to prepare for one. Here are seven ways to prepare for a recession:

1. Focus on building a budget

One of the best things to do to prepare for a recession is to build a budget, which will help you track your expenses, understand where your money is going and identify areas to cut back. Budgeting is a valuable skill that can come in handy if prices increase or you lose a source of income. Creating a budget helps you get a clear picture of your financial situation and make informed, strategic decisions about allocating your money and making it go further in a struggling economy.

To create a budget, start by tracking your expenses for a month or two. Then categorize your expenses into essential and non-essential categories. Essential expenses include things like rent or mortgage payments, utilities and groceries, while non-essentials include things like entertainment and dining out. Once you have a clear picture of your cash flow, look for areas to reduce spending.

If you’re not having any trouble paying bills and just want to budget to bolster your savings, the 50-30-20 budgeting plan is a great one to use. With this budget, you’d devote:

• 50% of your income for needs (i.e., bills, groceries, clothing, medical visits, etc.)
• 30% for wants (i.e., entertainment, dining out, etc.)
• 20% for debt and savings (i.e., credit cards, emergency fund)

2. Limit spending

During a recession, conserving your resources and focusing on the essentials is crucial. In addition to building a budget, you should also focus on limiting your spending to reduce your monthly bills. Creating a budget will make this step easier as it can help you identify areas where you’re wasting the most money.

Start your spending cuts with non-essential purchases, such as dining out or subscriptions to services you don't use. The money you save from non-essentials can help you pay down existing debt—just be sure not to take on new debt in the meantime.

Another great way to limit your spending is to focus on avoiding impulse purchases. Try not to shop when hungry, stressed or tired. When you do shop, make a list and stick to it so you’re less likely to overspend. Before buying something, ask yourself if you really need it and can afford it. Try limiting your spending by buying off-brand products or buying necessities in bulk from wholesale retailers.

3. Build an emergency fund

Building an emergency fund is another crucial step in preparing for a recession. Your emergency fund should ideally contain enough money to cover at least three to six months of living expenses, including housing payments, groceries, utilities, transportation, etc. This will provide you with a financial safety net in case of unexpected job loss, medical bills or other emergency expenses.

Build your emergency savings by saving a fraction of your income each month in a separate account that you don't touch. Because recessions can contribute to inflation, it’s a good idea to put this money into a high-yield savings account specifically so that the money earns interest to combat the declining value of the dollar. Some online banks and credit unions will offer a high promotional annual percentage yield (APY) on new savings accounts.

Make saving even easier and hold yourself accountable by setting up recurring automatic transfers that you don’t have to think about. Just make sure you aren’t incurring monthly fees—some financial institutions have surcharges for not keeping a minimum balance available in your account.

4. Pay off debt

Paying off debt is also critical when preparing for a recession. When times get tough, you'll want to have as little debt as possible weighing you down.

Prioritize high-interest debts

If you have multiple debts, it's important to prioritize the ones with the highest interest rates. Credit cards and personal loans are usually debts that tend to have higher interest rates, which may increase during a recession. These debts will cost you more in the long run and can be harder to pay off if your income takes a hit during a recession. This is why making the minimum monthly payment and continuing to add to the balance can contribute to losing control of your debts.

If your debt is already unmanageable, consider getting a debt transfer credit card that allows you to offload high-interest debt onto a credit card with a 0% interest rate for balance transfers. Just remember before applying that you’ll need a good credit score, around 690 or above, to qualify—and you may have to pay a fee equal to a percentage of the balance you transfer. However, if you pay off the debt during the 0% introductory period, you’ll still save money in the long run.

See also: The easiest way to pay off credit card debt

Work on your credit score

In challenging economic times, you may have no choice but to borrow money for unexpected expenses. If these times ever arise, you’ll need good credit to qualify for loans—and get low rates on those loans. Here are some ways you can improve your credit score:

• Pay your bills on time, every time.
• Keep your credit card balances low and fully pay them off monthly.
• Apply for credit sparingly—only when you need it and can afford to do so.
• Check your credit report regularly for errors and dispute any inaccuracies.
• Establish or rebuild credit with a secured credit card or credit-builder loan.
• Keep old credit accounts open, even if you're not using them, to maintain a long credit history.
• Avoid collections, charge-offs and other negative marks on your credit report.
• Keep your credit utilization ratio below 30%.
• Avoid opening too many new credit accounts simultaneously, as this can appear risky to lenders.

Repay student loans

If you have student loans, you should prioritize repaying them. Student loan debt can limit your ability to save for emergencies or invest in other areas, and if you're struggling to find work or have had your hours cut, interest rates on student loans may also increase during a recession and make it more expensive to carry this debt.

Utilize debt payoff tools

Mountain America Credit Union offers a variety of debt payoff tools to help you get out of debt faster and increase your financial stability. These tools can help you create a debt payoff plan, track your progress and make extra payments when you can.

5. Diversify investments

Diversifying your investments is another key strategy for preparing for a recession. By diversifying your investments, you can help protect yourself from the volatility of any one particular investment and help ensure that your overall portfolio remains stable even during economic uncertainty. Consider investing in retirement accounts, such as IRAs and 401(k)s, mutual funds, real estate and other investments that offer a mix of risk and reward.

Retirement

Investing in long-term retirement accounts during a recession, such as 401(k)s or IRAs, can allow investors to take advantage of potential market gains when the economy recovers. So while short-term market fluctuations can be stressful, the long-term perspective of retirement investing can help mitigate the impact of a recession. Many retirement accounts offer tax advantages to reduce your tax liability and offset losses that may occur during a recession, making it easier to stay invested for the long haul.

Watch video: How to plan & invest for your retirement

Mutual funds

These offer investors access to a diverse portfolio of assets, which can help spread risk and reduce exposure to market volatility during a recession. A well-diversified mutual fund portfolio can include a mix of stocks, bonds and other assets, providing more stability than investing in individual stocks or bonds. Mutual funds also offer investors a high degree of liquidity, meaning they can be easily bought and sold on the open market. This can be important during a recession, allowing investors to access their money quickly if needed.

While past performance does not guarantee future results, many mutual funds have a history of performing well over the long term. This can be reassuring for investors during a recession, as it indicates that the mutual fund has been able to weather previous economic downturns.

Real estate

During a recession, property prices tend to fall due to decreased demand, making it easier for investors to acquire real estate at a lower cost. Real estate can also provide cash flow in the form of rental income—even if property values decline during a downturn, rental income can help offset losses and provide investors with a steady income stream.

In times of economic uncertainty, the government may enact policies that increase the money supply, which can lead to inflation. Real estate can be an effective hedge against it, as real estate values and rental income tend to rise along with inflation.

6. Add multiple streams of income

Adding multiple income streams can provide you with extra financial security during a recession. This can include a side hustle like driving Uber or delivering food, starting a freelance business, selling handmade goods on Etsy, getting a part-time job, donating plasma or exploring other ways to earn extra income outside your primary job.

7. Secure a recession-proof career

Some industries, such as healthcare and education, tend to be more recession-proof than others. In contrast, other sectors, such as retail and hospitality, may be more vulnerable during an economic downturn as people look to limit their spending to necessary expenses. By focusing on developing skills that are in high demand and staying up-to-date on industry trends and developments, you can position yourself for long-term success and financial stability.

What to do now?

If you're concerned about preparing for a recession, the best thing to do is contact a Mountain America representative. Our team can help you assess your current financial situation and provide personalized advice and guidance on how to prepare for a recession. With the right preparation and support, you can be confident that you're taking the steps necessary to protect your finances and build a stable, secure future.

In the meantime, check out our financial calculators which can help you develop a plan for paying off debt, investing in the right places, refinancing and more.