Personal Finance Basics

How to prepare for a recession

May 29th, 2024 May 29, 2024 • Read time: 12 min

0524_PrepareforRecession

Two words that most people are afraid to hear when it comes to the economy–recession and depression. Today’s economic climate hasn’t done much to calm the public’s fears. While the American economy started 2024 strong, rising consumer debt and high interest rates are hurting economic growth. This means that consumer spending will likely decrease, which may spark worries of a recession.

There’s no need to panic, however! In this article, we’ll provide strategies and advice that can help you get through economic anxiety in the event of a recession. The important thing is to be prepared so any potential recession won’t impact you as much as you may fear it will.

Understanding recessions

What is a recession?

While there’s no “official” definition, a recession is usually declared when there is a significant decline in economic activity that lasts for an extended period–usually months or sometimes years. Most financial experts consider national economic factors such as gross domestic product (GDP), unemployment rates, consumer retail sales, and income and manufacturing. A recession occurs when these factors experience negative effects.

Recessions are often thought of as a regular part of a country’s economic cycle. All economies experience highs and lows as part of that cycle. A recession is one of the lows. Unfortunately, that doesn’t ease the anxiety of concerned citizens and the financial impact they may feel because of a recession.

That impact may include:

  • Potential job loss, leading to higher unemployment rates and a more difficult time finding a new job
  • Lower salaries and lesser benefits packages, since employers have all the leverage in hiring situations
  • Less health insurance coverage, as some employers take away coverage from employees to save costs
  • Less access to credit, since lenders are more hesitant to hand out loans to so many people who may lose their jobs at any given time; this leads to less spending, as consumers want to avoid high interest rates when making a large purchase such as a house or car
  • Tighter budgets, as prices go up and interest rates rise, leaving you less money to spend and save
  • More anxiety and stress as a result of all of the above

It’s important to keep in mind, however, that this impact won’t be felt by everyone. It’s still smart to be prepared just in case the worst-case scenario becomes a reality.

How do I know if a recession is coming?

There are some things to watch for, but it can be hard to know whether a recession is coming. There are still a few things you can do:

  1. Stay informed: Keep up with financial news. Many websites and news sources break down complicated topics like the economy and recessions so most people can easily understand them. A few of those are Investopedia, CNBC, and Bloomberg.
  2. Keep an eye on the stock market: Major stock indices like the S&P 500 and Dow Jones Industrial Average often signal economic changes–good and bad. Just check up on the Dow Jones or S&P 500 occasionally to see how they’re performing.
  3. Pay attention to consumer behavior: Something as simple as talking to friends and family can put you in tune with what consumers are saying about their financial experiences. If you notice more people than usual discussing or worrying about the economy, it could be a sign that a recession is on the way. The same goes for news reports.

Preparing for a recession

Getting ahead of the game is the best way to prepare for a recession. If you’re feeling comfortable financially right now, take advantage of this time to do a few things that can put you in solid shape if a recession arrives.

  • Build an emergency fund
  • Manage debt
  • Budget and cut expenses
  • Enhance financial stability
  • Protecting assets and insurance

Build an emergency fund

An emergency fund is a savings account dedicated to covering unexpected situations or financial emergencies. Having an emergency fund can set your mind at ease since you know you have enough money set aside for these types of things.

To build your emergency fund, open a new savings account specifically for this purpose, and set aside what you can (while still keeping enough to pay your bills and live comfortably) in the emergency account. If you already have one, keep adding to it. This provides you with some cushion in case a recession arrives and you need to access money. It also means you don’t have to max out your credit cards or take out a loan with high interest rates to get by.

Better yet, open a high-yield savings account for your emergency fund. In this type of account, your funds are easily accessible and they have the potential to earn a nice amount of interest. In fact, some high-yield savings accounts have interest rates up to 10 times higher than a standard savings account. This could help you build up your emergency fund faster.

Manage debt

During a recession, many people use credit cards for purchases since they don’t have the money in hand to pay for them immediately. Some financial experts recommend paying down your debts before a recession so you’re not stuck with interest payments if you happen to lose a job or experience an emergency.

Having debt also lowers your available credit, meaning you can’t put as much on your credit card as you might need to during a recession. Effectively managing your debt, even during a recession, is very important because it helps keep your finances stable during uncertain times. It can also lower your stress because you won’t have a mountain of debt to worry about.

If you’re able to manage your debt, take a look at all your debts and prioritize which should be managed or paid off first.

Prioritizing debt repayment strategies

If you have multiple debts, there are a couple of clever debt repayment strategies to consider. One is the “debt avalanche” strategy. This involves making minimum payments on all of your outstanding debts and then using any extra money to pay off the debt with the highest interest rate. Using the debt avalanche method can save you the most in interest payments while also reducing how long it takes to pay off the debt completely. This is a method worth considering as long as you can comfortably cover your regular living expenses and have built an emergency fund. During a recession, the debt avalanche method should probably be avoided.

The other strategy is called the “debt snowball” method. This has you paying off your smallest debts first, then gradually moving to bigger ones. When paying off one debt at a time, you’ll still pay the minimum payments on all your debts. Then you’ll put any extra money toward the smallest debt until it’s paid off, then the next smallest, etc.

Negotiating with creditors and exploring debt consolidation options

Debts can sometimes be negotiated. Some creditors and lenders are open to working with you to lower interest rates, negotiate a payment plan that works best for you, or even settle the debt. If you have a good credit score, a strong payment history, and a good overall relationship with the lender, your chances of debt negotiation should increase.

Be open and honest with the creditor or lender, explain your situation, and be prepared for the conversation with financial records to back up your request. Be calm, professional, and polite during your negotiation. If you’re unable to make any progress, ask to speak to a supervisor. Many lenders are willing to renegotiate the terms of your debt.

Another option is debt consolidation, which combines all your existing loans and debts into one loan, which you would then make payments on monthly. Debt consolidation not only simplifies your debt payments, but it also offers the opportunity to get a better APR than you have for your current debts. This can help save you money on interest payments.

Seeking assistance from nonprofit credit counseling agencies

An option you may not even know is available to you is reaching out to a nonprofit credit counseling agency for help. Many of these organizations, such as the National Foundation for Credit Counseling (NFCC), offer free or low-cost financial services and guidance that may help you manage or even eliminate your debt. Credit counselors are there to help you with your financial matters, including budgeting, debt management, and even negotiations with creditors. 

An online search of “nonprofit credit counseling” should provide you with a variety of options. The U.S. Department of Justice offers an extensive list of not-for-profit credit counseling agencies that can be searched by state. Nonprofit credit counseling and debt consolidation services and agencies should not ask you for any upfront fees or payments. If one does, it’s best to avoid using that service.

Budget and cut expenses

When economic times are uncertain, budgeting is a smart strategy to adopt. By staying on a budget, which involves tracking your income and expenses, you set yourself up to have the resources you need even during tough times. When you create a budget, you make sure you have the money for essentials, such as rent/mortgage, utilities, food, and healthcare, even if there’s a change in your job status. Here are some smart steps to follow when it comes to budgeting:

1. Assess your current financial situation

Before you create your budget, take some time to look at your finances as a whole. This includes your income, monthly expenses, savings, and debts. Once you have a good idea of how much money is coming in and going out each month, your budget begins to come into focus.

2. Create a realistic budget

Make sure your budget is one you can stick to. You’ll want to make essential expenses, as we mentioned a moment ago, the top priority. Once you’ve created a budget for those expenses, think about how much you can set aside for debt payments (loans, credit cards, etc.) and even savings. And even if money is tight, try to allow yourself a little bit of money to spend on things you enjoy. After all, we’re still living our lives. Just don’t go overboard with these expenses.

3. Track and analyze expenses 

As you move forward with your budget, pay attention to your spending and see where any adjustments might be made. For example, if your electric bill is high, try to cut back on costs by raising the thermostat by a degree in the summer or lowering it in the winter. Make sure the lights are turned off when no one is in the room. Try to stretch the time between laundry days. Little things like this can add up. You can also try to negotiate your bills (cable/internet and cell phone service are two that come to mind) and shop for cheaper options such as store brands.

4. Cut back on non-essential expenses 

While this may be difficult at first, it’s important to consider which non-essential expenses can be cut from your spending. Do you need that third movie-streaming service? Can you go out to eat once a month instead of two or three times? Are you willing to watch your favorite team play on TV rather than spending money on tickets?

You should budget for some enjoyable activities, but these are the decisions you’ll face during tough economic times. During a recession, that money is better served going toward essentials. And just remember, these are usually short-term sacrifices. The economy will bounce back, and you will be able to eat at restaurants more frequently again. You just may need to wait it out until you’re in better shape financially.

Enhance financial stability

Even beyond creating a budget and managing your expenses, there are a few steps you can take to make sure your finances are in solid shape.

Additional income

If your schedule allows, picking up a part-time job can certainly help. Regardless of your skills or background, there’s always someone willing to pay for small jobs or freelance side hustles. Check out job search sites like Indeed for part-time or seasonal jobs, and keep an eye on your social media for posts asking for help.

Skill development

Self-development is always a good idea, no matter the economic climate. If you have some extra money to put toward furthering your education (it could be a single class) or learning a new skill or trade, it’s an investment that could pay off if you’re able to find a higher-paying job at some point.

Professional network

Reach out to friends, family, current and former coworkers, and social media connections to build a professional network. The saying, “It’s not what you know, it’s who you know,” is often accurate. And getting to know more people can certainly help your chances of finding new or better opportunities.

Housing alternatives

If your mortgage or rent is getting too expensive to handle each month, look into other housing options. If you don’t need a lot of space, consider downsizing to a smaller home or apartment. If you live alone, it might be worthwhile to consider a roommate who can split all your costs.

Seeking financial education and assistance

Knowledge is power. It’s also the best way to protect and support yourself during difficult financial times. Here are some ways to gain important knowledge and find support when preparing for a recession.

Educational resources

There are several free or low-cost financial education tools and materials out there–you just need to search for them. We saved you some time and compiled a few to get you started.

  • Practical Money Skills: This website offers a huge selection of free financial literacy materials. Their resources cover everything from budgeting basics to retirement–and they even offer resources for kids so they can start developing good money habits. All you need to do is download the PDFs.
  • Consumer Financial Protection Bureau: Here you can also find a wide variety of free resources, including tools, worksheets, handouts, and audio recordings organized by financial topic.
  • Free online personal finance courses: U.S. News & World Report compiled a list of 12 free online personal finance courses that they recommend. You can find the list here.
  • Sun Loan resources: Sun Loan has several helpful and informative articles readily available for you to read and learn from. Our articles cover everything from personal finance basics to loans to tax questions.

Community support

You may not even realize it, but there are organizations and events right in your community. Just search online for “financial assistance near me” to find them. Take advantage of local support, expert guidance, and any other resources offering financial advice or help in your area.

Nonprofit and government aid

If you’re struggling financially, there is help available. USA.gov is a great resource that can lead you to help with financial hardship. They offer assistance with food, unemployment benefits, welfare, emergency housing, rent, utility bills, and home repairs. Additionally, you can find more state and federal benefits at Benefits.gov. Online searches will also guide to more specific sources of aid, including food, employment, and financial planning, among others.

Financial guidance

There is a surprising amount of financial guidance resources willing to provide free or cheap guidance and advice on budgeting, investing, saving, managing debt, and other financial topics. Here are a few places to find free or low-cost financial help from financial advisors:

  • Your bank or credit union: Between in-person consultations with financial professionals and free online tools and guides, your bank or credit union is a great place to start for financial advice.
  • Financial planning organizations and foundations: Many organizations and groups offer free or discounted financial guidance, including Advisers Give Back, the Financial Planning Association, the Financial Counseling Association of America, the Foundation for Financial Planning, and the U.S. Department of Housing and Urban Development.
  • Online brokers: You’ve probably seen commercials for big brokers like Fidelity, Schwab, and others. If you’re looking to invest your money, these brokers usually have many online educational resources to use that can help you get started.

Maintaining a positive mindset and support system

While we’d all love to avoid a recession and the stress that goes with it, you’re now better prepared to get through a recession if one arrives. By educating yourself on the different types of resources available, setting up a budget that gives you a cushion in the event of an economic downturn, knowing where to go for assistance, establishing a strong support system, and keeping an optimistic attitude, you’re more than ready to take on a recession.

Plus, navigating through challenging times and successfully coming out the other side is an important life experience that builds character, increases resilience, and offers important lessons. Remember, a recession is a normal part of the economic cycle and is not the end of the world. By arming yourself with knowledge and preparing ahead of time, you set yourself up for success.

Author – Holly Munoz

Holly Munoz serves as Regional Vice President at Brundage Management, the management holding company that operates Sun Loan and related subsidiaries. Holly has over 15 years of experience in the loan ... Read more »

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