How to Prepare for a Recession in 7 Steps

Preparing for a recession seems scary, but doing so will keep you financially secure. Follow the seven steps provided to keep you and your family safe in these troubled waters.

prepare for a recession
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We get it: people want to keep themselves financially secured, but how do you manage that during a recession? Recessions pose multiple problems– price increases, people not making enough money, and a lack of employment or job loss.

Since the United States has faced 10 recessions in 60 years, you may wonder when the next one will happen so you can prepare for it.

When product costs (like gas) jump and salaries don’t follow, that’s usually a good indication a recession may be brewing.  Thankfully, there are things you can do to keep your family safe as you prepare for a downturn. 

How should you manage your money? What should you do to save? What should you expect? We’ll cover everything you need to know to stay secure during a recession.

How to Prepare for a Recession

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1. Cash is king

Any time prices begin to inflate, you need to save money. When people say “cash is king,” they mean that cash will help you during and after a recession. 

Save cash through the downturn so when it’s over, you have some left for investing and future use.  While prices and values increase during the recession, they will drop once it ends.

The drop inevitably occurs since people can’t afford the costs, so they don’t make as many purchases. That means companies need to lower prices in order to boost their sales.

If you want to stay ahead of the game, save money for these drops and use them to make money later on. Doing so follows the philosophy of buying low and selling high, and you’ll have better opportunities when prices go down again.

Even if you don’t invest your cash, it’s still a good rule of thumb to save.

2. Cut your monthly budget

As a recession approaches, you’ll need to lower your monthly budget. Budgeting is an excellent way to keep tabs on your finances since it helps you save money while still covering your needs and wants.

As the financial situation fluctuates, you’ll need to adjust accordingly.  For example, you may notice you tend to overspend on groceries, so you may choose to forgo some more expensive luxuries or ingredients.

The same applies to other expenses, such as hobbies, fast food, etc. Make sure to frequently review your budget and make changes where needed.

Cutting your budget and adding more to your savings adds up fast. Maybe you start by cutting out your morning coffee run and making it at home instead. 

Even if you start by saving only 10 dollars monthly, you’ll save 120 dollars a year. The numbers increase the more you find ways, big and small, to reduce your expenses.

If you find yourself spending past your budget, adjust it to better fit your spending needs. Take from one category to support another and maintain balance.

3. Consolidate bad debt

Sometimes, people need to go into debt to cover essential expenses. For example, you could get a mortgage for your home, or you need to pay off student loans. 

However, based on the situation, you may have high-interest rates on your debt. Unfortunately, this only makes the debt costs continue to rise, so they can be challenging to pay off.

If you can consolidate your bad debt, you can save more money and avoid problems when a recession arrives. When paying off debt, you have two options: refinance your loans or pay more toward the debt.

Refinancing works since you can pay off the original debt with a new offer. When people take this approach, they seek a debt with a lower interest rate, therefore saving money since they don’t need to pay as much as the previous one.

When you have debt, you should always strive to put as much money toward it as possible. The concept works like this: you spend more money now to save later.

That way, you eliminate the future costs that would’ve been accrued through that interest. 

4. Grow your emergency fund

Have we established how important saving is yet? During a recession, you may spend more money than you make, so it’s possible you’ll need a little extra saved up. 

This is where an emergency fund comes in. Hopefully, this won’t be you, but some people may lose their jobs and need the extra buffer for that as well.

If you have an emergency fund, you can use it while you try to make more money or get a new job. You should save three months worth of income at minimum for an emergency fund to avoid financially tricky times.

You can best save money if you establish an emergency fund when you’re financially comfortable. Do your best to contribute to your emergency fund regularly.

Maybe add your change to a coffee jar, or add 15-50 dollars per paycheck.  Avoid using the emergency fund unless you have no other option.

Then, you can save it as a backup plan when you need it the most.

5. Don’t get emotional

Regarding decision-making, emotions sometimes prevent us from making the wisest choices. We’ve all been guilty of making poor financial decisions when we’re panicked or stressed. 

If that’s you, recognize and note this about yourself so you know to watch out for it. Stress-eating, retail-therapy, and taking the quickest path to reduce stress are all examples of emotional decisions. 

Instead, try to make financial decisions only when you’re feeling relaxed. If you become anxious or stressed, give yourself a few moments to calm down.

Once you can breathe, then you can think of your plan and decide on the ideal choice for you.  No matter how much we prepare, we can never plan for absolutely every outcome.

Remember that as long as you save money and stay calm, you’re going to be okay.  Try some of these ideas if you need to calm down.

  • Take a nap and relax.
  • Spend some time enjoying your hobby.
  • Try some breathing exercises.

These techniques will help you prepare for financial decisions and avoid financial problems if a recession arrives.

6. Get rid of any margin

If you get involved with stocks, you need to consider your margin loans and pay them off. Margin loans mean you borrow money to purchase stock. 

Investors tend to use margin to get involved with higher-paying stocks. If you have a margin, do your best to eliminate it as soon as possible– you don’t want to have that debt if the stock market crashes. 

If you don’t, you may find it challenging to do so during a recession. The margin loan could cause you to lose money and face financial challenges.

However, if you pay them off before it hits, you don’t need to worry about paying them during a tough financial period.  Like any loan, you want to address it immediately and pay it off to avoid unnecessary stress.

7. Create more passive income

Passive income is a method of making consistent money whenever you hit difficult times. However, to make a reliable passive income, you have to work on setting it up ahead of time.

For example, some people make passive income by renting out property. Others make passive income as they sell products online, such as through sites like Etsy or eBay, run a YouTube channel, or run small businesses. 

None of these are built in a day. They require a time-investment to work.  Passive income is great to have because you receive it regardless of what’s going on with your day job. 

Unfortunately, it does require that crucial setup period, so establishing one once you’re in the recession may prove difficult– especially since supply costs for certain passive income methods will have increased. 

Passive income also protects you if you run into problems with your job. While it won’t always support you completely, the additional boost will help keep you on your feet.

Next Steps

Preparing for a recession will help you remain safe and avoid financial troubles. Save your money. Pay-off high interest loans and get out of debt where you can.

Adjust your budget to help you pay off those debts.  And most of all, remember to take a deep breath. We’ve made it through recessions before, and we’ll do it again!

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FAQ's

Still have recession questions? We can help!

What is a recession?

A recession is when the economy drops and continues to drop for two economic quarters. That means the economy shows lower activity and higher expenses, so people may struggle financially.

What is the difference between a recession and a depression?

Recessions and depressions are the same in regard to economic collapse. However, depressions last significantly longer and have steeper consequences.

In short, think of depressions as prolonged recessions.

What typically happens in a recession?

As a recession begins, prices will start to increase. For example, you’ll see housing, local goods, gas, and similar expenses increase, so you need to spend more money.

However, salaries and income usually don’t grow, so people struggle to cover the costs.

Where should I put my money in a recession?

While you can leave your money in the bank, you should always keep at least some cash on you. It acts as a little extra insurance when you need it and is readily accessible to you.


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