Consumer Blog

Is a recession coming soon? It’s a question that many people have been asking lately, but on which there’s no solid consensus. One survey of economists has them projecting a 59% likelihood of a recession hitting by July 2024. And the experts aren’t the only ones pondering the question — in a recent survey by Nationwide, 68% of Americans said they expect a recession within the next six months, and nearly 80% of them believe the recession that’s coming will be “severe.”

Here’s the thing: A recession — which is technically defined as two consecutive quarters of negative economic growth — will come. Eventually. Since the end of World War II, the US has experienced 12 of them — on average about one every six to seven years. According to the National Bureau of Economic Research, they last an average of about 11 months.

That’s why, no matter where you stand on the recession debate, there’s one thing absolutely everyone can agree on, and that’s the need to be prepared financially. During tough economic times, it’s incredibly important to make sure you’re able to survive a layoff, a loss of income, or tightening credit — and have as little stress in your life as possible.

Thankfully, there are ways to prepare for a recession and make sure you’re ready to weather the storm (or storms as during your financial life you’ll slog through many more than one.). Here’s a rundown of some of the best (and most effective) prep work you can do.

Have an Emergency Fund

One of the worst things that can happen during a recession is you lose a job, and you don’t have enough cash on hand to make it through the downturn without selling your stocks at a loss. In other words, you don’t want to have to dip into your retirement funds to make it through a lean period. The best way to make sure you’re ready to handle a possible downturn is to build an emergency fund, explains Jason Preti, certified financial planner at Unleashed Financial LLC.

Most people should look to set aside 4-6 months’ worth of living expenses in a dedicated fund for emergencies, Preti explains. When you think about what falls under the category of “living expenses,” consider all the basics that you need to run your life comfortably. This includes money for rent or mortgage, food, healthcare, and things like utilities, gas, and a cell phone bill. Essentially, you want to be able to keep a roof over your head and the lights on no matter what the economy throws at you.

“Emergency funding is hugely household and job specific,” Preti says. For most two-income households, an emergency fund of at least three months of expenses is sufficient. If you’re a one-income household (with no second income to fall back on), double that. And if you know you have an at-risk job, consider beefing up these numbers to compensate.

If you’re doing the math and these suggested dollar amounts seem daunting, don’t be overwhelmed. Aim for $2,000 to start. That’s enough to bail you out of a lot of emergencies. Then, add to your reserves every pay period so the money will be there for you when you need it. Here’s more on emergency funds

Go On an Austerity Budget

The budget that you have today is based on a certain level of earned income — but if your level of income changes during a recession-induced job loss, then it’s time to create a new budget that meets you where you are. An austerity budget — a budget that’s pared down to cover only your barest of necessities, with no frills — is where you’ll need to start.

The goal is that an austerity budget helps you control your expenses and maintain financial stability during challenging economic times. To create one of your own, start by reassessing all your monthly expenses and prioritizing your essentials, such as housing, utilities, groceries, healthcare, and transportation. These line items will be your budget’s only priorities until you’re able to secure additional income. The goal is that by paring down to the necessities, you’ll be able to cut out discretionary spending for things like dining out, entertainment, subscription services, or other non-essentials like those checkout line impulse buys.

Austerity budgets aren’t just for people who have faced a job loss. Many people who simply want to save as much as they can, or who may be worried about a future reduction in income will often look to craft a strict budget to ensure their financial futures are stress-free. And at the same time as you make budget cuts, you’ll also want to keep an eye out for cost savings with your essentials. For example, you need groceries, but you can shop first at the discount grocer or dollar store, use coupons, shop sales, and make swaps for cheaper alternatives (like generic vs. name brand).

Think Long-Term and Stay the Course

As much as we might all like to think we’ll be able to handle the stress of recession-induced portfolio losses like a champ, few of us have the ability to make well-thought-out financial decisions when we’re under pressure. But tuning out the noise during turbulent times is essential — when we think long-term and stay the course with our investments, we fare so much better.

Fidelity did a study that compared people who sold all their stocks during the 2008 financial crisis with people who stayed invested. Ten years later, investors who chose to stay the course and ride out the downturn had nearly $80,000 more in their accounts. That’s huge. In other words, as painful as it may be to check your portfolio balances during a recession, it’s always better to wait it out. Patience is not only a virtue, it’s a distinct advantage!

But what should you be doing instead of worrying? Think long-term. One of the best things you can do is to buy more stock if you can. “If you’re regularly contributing to a retirement or savings account, make sure to continue making these contributions. Market downturns present opportunities to buy stock at lower prices, which may benefit your long-term savings,” says CFP Melissa Walsh, founder and president of Clarity Financial Design.

Look at Future Career Growth

Lastly, if you’re worried about job loss during a recession, now may be a good time to look toward future career growth — or even other career possibilities. “If you have an interest outside of your current job, consider starting a side hustle like freelancing or consulting in your area of interest,” Walsh says. “This can help you gain experience and evaluate a career change. Likewise, consider seeking skills training and career education if you’re not sure about your next steps. This training can make you more employable when seeking a new job.”

from our partnership with HerMoney/Filene