How to help prepare financially for a recession

1. Understand how recessions work—and that they aren’t permanent.

2. Revisit your monthly budget—and stick to it.

Sticking to a budget can help you manage your living expenses to save more for emergencies, pay down debt, and set realistic goals for your future.

During a recession, it might become more challenging to follow your usual budget. For example, if you lose some or all of your regular income, you’ll likely need to find ways to spend less than you’re used to. When recessions happen, many people try to save money by shopping around for deals and discounts and cutting back on nonessential spending.

One of the best ways to help recession-proof your finances is to simply have a budget that you review regularly. Budgeting when times are good can help you save and prepare for the unforeseen—and adjusting your budget when there’s a downturn can help you make it through. (Just remember that finding small ways to treat yourself can be worth it for your well-being. It’s still OK to buy that cup of coffee from your favorite local shop.)

3. Build up your emergency savings fund.

Consider an emergency fund your financial safety net—and one of your reasons for budgeting. An emergency fund can help you prepare for the unexpected, whether that’s a loss of income, a car repair, or a medical bill.

If you haven’t started one yet, shoot for an initial goal of stashing $1,000 in a high-yield savings account, and set it aside for true emergencies only. Once you accomplish this, work toward saving three to six months of expenses in the account. And if you want to feel even safer from there, some experts recommend saving a whole year’s worth of expenses in case of events like a recession.

Our emergency savings calculator can help you determine how much to set aside each month to reach your goals.

4. Have a plan for your debt.

Paying down debt can give you more room to save and a mental boost as you see the amounts you owe go down—which can make a big difference during a recession.

Your debt payment plan is all about your personal priorities and circumstances. There are two common approaches:

• Snowball: With this method, you pay off your smallest debts first while making the minimum payments on the rest. Then, work your way up to paying off the bigger ones. If you get motivated by racking up small wins, this may be the right move for you.
• Avalanche: If you take this strategy, you make all your minimum payments, but then spend the rest of what you’ve budgeted for debt repayment on the debt with the highest interest. If you have a lot of high-interest debt—from credit cards or payday loans, for example—this approach can help you save more money long-term than the snowball method.

Our debt versus savings calculator can help you determine where to put your money to have the most impact. It may feel challenging at first, but it is possible to build an emergency savings fund and pay down debt at the same time.

5. Focus on your career, skills, and networking.

Evidence shows that more educated workers fare better during recessions. During the recession that followed the 2008 financial crisis, the unemployment rate for people with a high school education was double that of workers with a bachelor’s degree or higher.^{Disclosure 2} But an advanced degree or certificate isn’t the only way to invest in yourself and prepare for a recession. These ideas for professional growth can not only help you during periods of economic uncertainty—but over the course of your lifetime.

• Freshening up your resume or portfolio: With up-to-date career documents, you can proactively apply for new and better-paying opportunities.
• Talking with your manager: If you’re in a position to ask for a raise or promotion at work, you could end up with more career stability and income.
• Starting a side hustle: Establishing a backup income stream, whether it’s through a side hustle or a part-time job, could help you feel more confident in case of career instability. It could also provide opportunities to expand your skills.
• Networking: Whether it’s in person or online, networking events and websites can help open the way to more or better career opportunities.
• Upskilling or reskilling: Consider focusing on your talents—particularly ones you can continue developing to advance your career—or learning new skills that could help you land a different type of job.
• Becoming an expert in a unique area of your industry: Establishing yourself as a subject-matter expert and building your online presence around it may help you gain more job security.
• Going back to school: Although higher education can be expensive, it could potentially help you reach your career or income goals. Consider factors like your financial situation—including your outstanding debt and your willingness to take on more—before making a decision. Be sure to compare your different options for continuing education, too. If grad school isn’t right for you, there may be online certifications in your field that you could pursue at a more affordable cost.

6. Stay the course and take a long view with investing.

During the past 10 recessions, the S&P 500 has entered a “bear” market, dropping by an average of 31%.^{Disclosure 3} But you probably shouldn’t panic-sell your stocks or liquidate your 401(k) when this happens, especially if you’re invested for the long term.

Nobody can know exactly when a recession or bear market will start or end—and attempting to “time” market swings may lead to poor results. After the past ten recessions, once the S&P 500 bottoms (reaches its lowest point during the recession), it’s gone up by 40% on average in the following year.^{Disclosure 3}

There are also proactive steps and ongoing strategies you can take to help make your portfolio more resilient during a stock market downturn. For example:

• Dollar-cost averaging means investing steadily and consistently over time. This may help your investments stay more resilient during volatile markets and gives you an opportunity to continue buying stocks when they’re “cheaper” during a decline.
• Diversifying your investments means not putting all of your money into just a few stocks or one asset type (aka, not putting all your eggs in one basket). You can choose to invest in products like index funds that track the performance of the S&P 500—which can help make it easier to maintain broader stock market exposure. You can also explore investing in different types of stocks (larger companies, midsize companies, smaller companies, and international companies), along with other types of assets.
• Choosing “defensive” stocks is another option. These are companies that are known for their stability, even when the rest of the stock market is out of sorts. Although you may not want to focus all of your investments in the same industries, quality companies in certain sectors like healthcare and consumer staples tend to be more resilient when recessions happen.
• Working with an advisor is generally a smart bet if you’re ever unsure about how to invest or what to do with your investments. A good financial advisor can help lay out a plan for your finances to weather a recessionary storm—and they can help you keep your head cool over your investments if they drop in value.

Whether it’s focusing on your budget and career, shoring up your emergency savings, or brushing up on your investing strategy, you can take steps now to help give yourself more peace of mind and financial resilience in the future, regardless of whether the economy is up or down.