How to Prepare for the Next Recession
We may be heading into a recession.
The economic vibes have been quite bad lately. The headline news is the tariff madness. One day they’re on, the next day they’re off (but mostly still on). No one really knows what the trade landscape will look like over the next year, which makes it difficult for companies to make decisions.
The stock market has seen a ton of volatility this year. I’m not even going to bother throwing numbers around because they could be different by the time this gets sent out, but as of now, the stock market is down on the year but not by quite as much as it was a few weeks ago.
Consumers are increasingly pessimistic about the economy. The University of Michigan consumer sentiment survey released Friday showed an 8.4% drop from March and a 32.4% drop from a year ago. Consumers expect inflation to rise 6.5% over the next year, up from 5% in March.
Goldman Sachs raised its recession forecast to 45% (which it later rescinded, but only after a temporary pause in some tariffs was announced). JPMorgan has the odds of a recession at 60%. Most CEOs now believe a recession will come within the next six months.
A recession is defined as two consecutive quarters of negative GDP growth. This means we usually don’t immediately know when we’re in a recession, but there are plenty of indicators that will tip us off before the official call.
A recession means a slowdown in economic activity, often bringing with it mass layoffs and lower wages. This recession could be unique in that at the same time people have less money to spend, the goods they rely on are more expensive. To make matters worse, the federal government will start collecting payments on defaulted student loans in May.
Without making any predictions, it feels almost inevitable that we’re heading toward a recession this year. Whatever happens, everyone should be prepared. Here’s how you do that.
Take Stock
The first thing you want to do is take stock of what you have. This could include:
Cash you have on hand
Investments: brokerage and retirement accounts
Credit cards and other lines of credit (like a HELOC)
Debt (going into a recession with credit card debt is going to hurt)
Insurance policies
Your job stability and potential side income
Expenses: how much you spend and what you could potentially cut
You could also approach your finances from a SWOT analysis framework: strengths, weaknesses, opportunities and threats. Figure out where you are and what work you need to do.
Build an Emergency Fund
An emergency fund is a critical tool in any economic environment but especially in a recession. Normally, an emergency fund will help you cover unexpected costs like car maintenance, medical emergencies or home repairs. During a recession, the emergency is more likely to be a loss of income if you are laid off. In that case, six months of expenses will be the bare minimum rather than the ideal amount to target.
If you don’t have six months of expenses saved, it’s a great time to work on that however much you can. If you already have six months of expenses, it can’t hurt to save a little extra, especially if you don’t feel great about your job security.
Emergency funds should be held in a savings account that pays a high yield relative to other banks, which you’re most likely to get at an online bank. It should also be an FDIC-insured institution. Beware of absurdly high interest rates through fintech products that aren’t real banks or risky crypto projects. Investing your emergency fund is also a terrible idea, because during a recession the stock market is more likely to lose value, leaving you with fewer funds.
Make a Bare-Bones Budget
A budget helps keep your spending under control and in line with your values. But when riding out a recession, you may need to make some sacrifices. That’s where a bare-bones budget comes in handy. It’s essentially a modified budget that strips away non-essential items to reduce your spending.
To create a bare-bones budget, start with your normal budget and identify items that you can live without. This might include streaming services, non-essential clothing, restaurant spending, vacations and other things that aren’t absolutely essential to running your household finances.
It also includes taking a look at essential expenses like groceries, which can’t be eliminated but can be pared back with some planning. Instead of buying red meat, you buy more chicken. Instead of going out to eat, you take time to cook more.
The goal is to put off consumption until things get better.
Pay Off Debt
If you have the cash flow now but might not in the event of a job loss, paying off your debt can deliver a huge return on investment. Most of the time, it makes sense to target your highest-interest-rate debts. If you have credit card debt with an interest rate between 20% and 30%, now is the time to get rid of it.
Don’t worry much about debts with lower interest rates, like a mortgage or car loan, or anything with regularly scheduled payments. You’re probably factoring these things into your emergency fund anyway, and they are more difficult to get rid of quickly.
Work on Professional Development
The risk of layoffs increases in a recession, so doing things that help further your career can help put you in a position to bounce back quicker. You can:
Update your resume
Brush up on skills
Learn new skills
Take courses relevant to your job or jobs you want
Tap into your network
Even if you think your job is secure, it’s good to be prepared.
Wildcard: Buy Stuff?
The recession we may be heading into could be paired with higher prices. This is about the worst possible combination, but preparing might actually involve making big purchases in anticipation.
There’s not much you can do to prepare for higher grocery prices, but if there are durable goods you were already planning to buy, you can get ahead of tariffs by doing that now. These items are particularly vulnerable to tariffs:
Electronics (headphones, gaming systems, cameras, phones, tablets, computers)
Clothes (imports from China and Vietnam are hit hardest by tariffs)
Furniture
Kitchen appliances
Cars
Don’t panic buy anything you weren’t already going to buy. But if it makes sense, get it now before tariffs cause the price to spike.
Be Prepared for Anything
It’s good to be prepared for anything, including that everything will be fine for you personally. Some people get lucky during a recession. Some people even thrive if they’re in the right industry.
There are also some things you want to avoid. The stock market has been all over the place lately, so now would be a bad time to sell investments unless you really need the money. Don’t touch your 401(k) or other retirement accounts in a panic. Long-term there is no reason to be concerned even if things seem scary right now.
If you’re in a good place right now financially, there is plenty you can do to put yourself in the best position possible to weather a recession. Notice that none of the advice I’ve laid out here is a bad idea regardless of the economic outlook. Now is not a good time to panic, but it is a good time to make moves that allow you to come out of this stronger.
It’s not a bad idea to always have your finances recession-proofed.