How to Prepare for a Recession

According to many economists, the US has entered a recession, due to the COVID-19 coronavirus pandemic. Already dubbed the Great Lockdown, this recession has the potential to affect the global economy.

No one can really predict when a recession will hit, but data shows that the US experiences recession, on average, every three years. While a natural part of the economy, recession is a scary and challenging time. It’s time to get your finances in order to ensure you can survive this recession—and the next recession when it hits.

Here are five steps you should take to prepare for a recession:

1. Pay down your debts
2. Build up your savings
3. Adjust your portfolio allocations
4. Reduce expenses
5. Improve your marketable skills

A mother teaches her daughter how to prepare for a recession by teaching her good saving habits.

5 Steps for Surviving a Recession

1. Pay Down Your Debts

The first step to preparing for the next recession is paying down your debts, especially high-interest debts like credit cards. When a recession hits, you don’t want to be burdened by interest on old debts.

Use our credit card payoff calculator to determine how long it will take you to become debt free, then work toward that goal.

2. Build Up Your Savings

The next most important way to prepare for a recession is to build up your savings. Experts recommend having at least three to six months’ worth of savings on hand in case of an emergency. If you get laid off during a recession, you’ll need that money to keep yourself and your family afloat until you find a new job—which, unfortunately, will likely be more difficult during a recession.

Keep in mind that recessions last, on average, a year and a half. If you’re in a fraught industry or are otherwise concerned about a recession hitting you hard, try to save up for at least a year and a half’s worth of expenses so you can ride out the recession if necessary. It takes a while to build up that much savings, so start now.

3. Adjust Your Portfolio Allocations

During a recession, stock markets will fall. To financially prepare for a recession, adjust your investment portfolio before it hits. The key to adjusting your portfolio for a recession is to determine your risk tolerance first, keep an eye on the big picture and avoid making knee-jerk reactions to a volatile market. Once you know how much risk you’re willing to take, there are a lot of ways you can diversify your portfolio to protect your money and yourself. Be sure to talk to a financial adviser before making any changes to your investment accounts.

Here are some potential investment strategies we’ve found for adjusting your portfolio allocations in preparation for a recession:

  • Diversify your 401(k) and other investment accounts. Investing too heavily in stocks during a recession can devastate a 401(k). If you are risk-averse, consider adjusting your portfolio to invest more in bonds, keeping in mind how much time you have before retirement.
  • Invest wisely in companies with strong portfolios and histories. Before you invest in a company, do your due diligence to determine their history and performance, especially during past recessions. Companies with less debt and more cash on hand may be better able to weather a longer recession.
  • Invest in consumer staples. Utilities, health care, and other consumer goods will still be needed during a recession and are generally considered good investment options. Like any other investment, though, don’t invest too heavily in a single sector.
  • Open a money market or other insured savings account. The return on money market funds isn’t as high as other investments, but the risks are lower too. Money markets are insured and often come with higher interest rates than other savings accounts. They require higher deposits, but you can access the money whenever you need it, unlike a CD.

4. Reduce Your Expenses

Living within your means is always good financial sense, whether you’re preparing for a recession or not. Create a budget that helps you prioritize building your savings, paying down debts, and spending your money on the right things. To best prepare for a recession, you’ll want to avoid unnecessary purchases or adding new debts during this time.

5. Improve Your Marketable Skills

No matter how well you prepare, you can’t anticipate what will happen if a recession hits. Do what you can now to improve your skills and network with other industry professionals. You want to better your chances of keeping your current job or getting a new one by demonstrating your worth now. The goal is to prove to your current employer that you are a valuable part of the team, even if a recession hits, and build other marketable skills you can use if the worst happens.

What Does Recession Mean for My Credit Score?

Recession itself won’t necessarily affect your credit score. How you prepare (or don’t prepare) for a recession might. The biggest risk to your score is late or missed payments. Your payment history accounts for 35% of your credit score, so you should prioritize paying all of your bills on time and in full whenever possible.

It may also be difficult to keep your credit utilization low if you’ve been hit hard by a recession. Try not to rely too heavily on your revolving lines of credit and keep your utilization below 30%.

If a recession causes you to start using your credit cards more—or less— regularly, your issuer may enact a financial review. A financial review could suspend your ability to spend or even shut down your account entirely. When an issuer closes your account, your credit report will include a note that it was closed by the issuer. This will not affect your credit score on its own, but if the closure increases your credit utilization or decreases your mix of accounts or account age, it could have a negative affect.

Follow our eight tips for building credit during a recession to keep your credit score healthy and strong.

Protect Your Finances During a Recession

Don’t panic! Following these five simple steps can give you tools to have more confidence knowing you are prepared to take on this recession. Talk to a financial adviser and check with your account holders to talk about your options.

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