How to Get Your Finances Ready for a Recession

Set up some financial safeguards that can help you weather an economic downturn.

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The rumblings about a recession began in early 2022, and economists predict there's about a 50-50 chance of a recession happening in either 2022 or early 2023, thanks to inflation. Fortunately, most experts suggest that this will likely be a mild recession—nothing like the 2008 Great Recession that wreaked havoc on many people's savings and careers. But there are some money moves you might want to consider to recession-proof your finances—and help you weather any uncertainty.

Financial Moves to Make Before a Recession

Pay off high-interest debt.

If you have credit card debt, personal loans, or other high-interest debt, the first task is to pay that off as quickly as possible. "Those need to be addressed immediately and prioritized over savings," says Isabel Barrow, director of financial planning at Edelman Financial Engines. "The rates on these are usually higher than what you can make on your cash and the interest compounds. Think about it this way—if you lose your job but have no debts, you can always go back to the credit cards to get you through the rough patch."

Shore up your emergency fund.

Once your high-interest debt is taken care of, bulk up your emergency fund. "During a recession, it's common for the unemployment rate to rise quickly, and it doesn't usually fall as fast during the recovery," Barrow explains. "You need to ensure you are able to weather the storm in the event of any income disruption." Barrow recommends that her clients stash six months to two years' worth of income to cover themselves for recessions—but any amount you can save now will be helpful.

Reconsider big purchases.

If you're still in the red-hot housing market or hoping to upgrade your car, you may want to step back, especially if you have any concerns about job security. "The level of demand is still very high for cars, houses, and travel, and the supply is very low," Barrow says. "If you don't necessarily need it now—don't buy it."

People who snatched up bargains in the last recession might be hoping to score a deal again—but they may be disappointed. Craig Birk, CFP, chief investment officer at Personal Capital, says that the prices won't drop as precipitously as people saw during the 2008 recession, thanks to the excellent credit most homeowners have. "Supply and demand should remain more balanced in this cycle," Birk explains. "With higher mortgage rates and lower affordability, home prices may drop, but only moderately."

Managing Finances During a Recession

Review monthly expenses.

We all probably have a few spots where we could scale back on our spending—so review bank and credit card statements to see where you might be able to save. "Now is a great time to review the details of where your money goes," Barrow says. You can put the money you save toward cash reserves or get a little more wiggle room in your budget in case expenses increase—or income decreases.

Assess job security.

As of July 2022, there have been a few reports of layoffs, but the job market remains incredibly tight, with unemployment at just 3.6 percent. Consider how well the company where you work is doing and your individual risk for a layoff. If you're concerned about losing your job, now may be the time to update your LinkedIn account and check in with people in your network to see if new opportunities exist.

"The less secure your job is, the more you should be thinking about your backup plan now," Barrow says. "Are there other options for you to generate short-term income, either immediately or in the event that you have a job loss or reduction?"

Don't cash in investments.

Most investors took a significant hit in their 401k portfolios in early 2022, which makes cashing out or trading into more conservative investments seem like a smart idea. But experts say it's much better to stay the course.

Now is not the time to convert investments to cash. "While markets are likely to remain volatile and unpredictable, cash is all but guaranteed to lose value to inflation," explains Birk. "Long-term cash should be invested toward long-term goals, especially with higher inflation eroding spending power."

And trading stocks that were solid performers in the past for more conservative choices will lock in your losses—and keep you from recouping those losses when the market rebounds. "Making more trades might give you a temporary sense of control, but it typically causes more harm than good," Barrow says. "You're likely just increasing your costs and taxes while decreasing your overall long-term performance."

Reconsider retirement plans.

If you're close to retirement (or already retired), you might need to adjust your plans—either by saving more money for retirement or being more frugal with the money you're spending. "Those considering early retirement may look more closely and consider adding to reserves," Birk says. "It's also worth reviewing existing retirement spending goals in light of higher prices."

Increase retirement investments.

It may seem a little scary to put more money into a volatile stock market, but as long as the money isn't something you need in the next few years, it pays off to keep going. "A recession or bear market is not likely to have a major impact on your long-term plans, but it does mean that you may be able to be opportunistic now," Barrow says. "We don't often have opportunities to buy low, as the market is up more often than down, so consider if this is an opportunity for you—as long as it doesn't mean you are taking a high risk or borrowing money to fund additional investments."

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