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How to Prepare for a Recession Like a Financial Expert
It’s the word on everyone’s lips and minds: recession.
For the millennials among us, you may remember the recession of 2008. Whether you heard about it on the news, in the classroom, or at the dinner table, it was likely that while you had some understanding that a recession was not good, you didn’t really grasp the various financial and emotional implications that it had on your parents, communities, and country – we sure didn’t.
But 14 years later, we have found ourselves on the brink of another recession – this time with our own finances to be concerned about. So, naturally, many of us are wondering how we can be as prepared as possible for what is to come economically.
But where tf should you start? And how do you even begin to prepare for a recession in a way that actually makes a difference, rather than just shooting in the dark?
We gathered insight from some of our favorite, most trusted financial creators on how you should prepare for a recession so that you too can prepare for a recession like a financial expert.
But first…what even is a recession? How will it affect your finances?
There is a lot of dialogue in the financial world right now all about the recession. But despite the abundance of conversations, there’s also a lot of ambiguity and lack of clarity about what exactly it means to be in a recession and how it will affect your personal finances.
So, before we jump into the expert tips (don’t worry, they’re coming!), let’s talk a little bit about what a recession really is and how it will affect you.
According to Investopedia, a recession is defined as “a significant, widespread, and prolonged downturn in economic activity.”
Now, that doesn’t mean that we are in a recession every time the economy takes a bit of a hit. The key here is that this is a prolonged downturn – usually meaning that it will last six months or more.
So what causes a recession? Well, you know how, in a chain of dominoes, once one domino falls it knocks over the next one, which then knocks over the next one, and so on and so forth? This is exactly what happens in a recession: one (or usually multiple) factors knock down one “domino” which then puts our economy on a [somewhat unavoidable] track towards a recession.
The recession domino effect looks something like this:
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Something causes a decline in the economy
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The economy has been trying to weather the compounding financial effects of the pandemic, but they were too significant and ultimately were the catalyst for the upcoming recession.
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Other factors make the decline in the economy worse
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Despite The Federal Reserve raising interest rates with hopes of slowing down inflation, Russia’s invasion of Ukraine caused a lot of economic concerns which, in turn, caused inflation to continue to increase.
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By this point, the general public will really notice the pains of inflation as things like gas, cars, rent, and groceries become more expensive.
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The stock market begins to suffer
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As inflation increased, the performance of the stock market decreased, resulting in a lot of companies losing a lot of money.
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Companies started to prepare for a recession
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Yay for being prepared for a recession, right? Don’t get too excited too fast – in this case, preparing for a recession meant pausing on hiring, and even starting to lay people off in order to conserve money. Yikes.
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Consumer spending decreases dramatically
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As the cycle continues, the next domino to fall will be a decrease in consumer spending. As a result of higher rates of inflation and an increased chance of being laid off, many consumers (like you and me) will cut back on their spending dramatically, meaning that local businesses and large corporations alike will continue to bring in less revenue, which will likely result in…
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Laying off more employees
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An increased cost for goods and services due to a shortage of labor
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A further decrease in consumer spending
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…and thus the cycle of a recession continues.
Are we in a recession right now?
If you’re thinking “holy f*ck that sounds awful,” you’re not wrong. But despite what the clickbaity headlines are telling you, we are not currently in a recession…yet.
While journalists and infographics may be telling us that “the stock market is at an all time low for the past two years,” what they fail to mention is that the stock market as a whole has been at an all-time high for the last twelve years. So even if it might currently be at a two-year low, it has still been on an upward trend consistently for over a decade.
So while we are feeling some of the early pain points of a recession (inflation, shortages on certain goods, etc.), it’s important to note that we aren’t in a full-fledged recession just yet.
This is great news because it means that we still have time to make appropriate adjustments to our lifestyles and finances so that we can be as prepared as possible for a prolonged season of economic downturn.
How to prepare for a recession like a financial expert
We reached out to some of our favorite financial creators to ask how they personally recommend that you prepare for a recession so that you can prep your finances like a money expert. Here’s what they each had to say.
Tori Dunlap
You know her. You love her. She’s HFK’s founder and fearless leader as well as an internationally-regarded personal finance and investing expert who is all about providing valuable, actionable advice that makes navigating the world of personal finance accessible while teaching women everywhere to use their money to make the world a better place for women and marginalized groups.
Tori’s Tip #1: Pad your emergency fund
“The first thing I need you to do is check in and make adjustments to your emergency fund. If you have followed HFK for a while then you know I recommend having at least 3 months of essential expenses saved in an emergency fund, but now is the time to really bulk that up. Not only will this give you more wiggle room and time in the case of an emergency (like unexpectedly losing a job), but it will also keep your emergency fund relevant to today’s rate of inflation. If you put 3 months of expenses in your emergency fund five years ago, that same amount of money might not reflect three months of living expenses now due to inflation.”
Tori’s Tip #2: Make sure your emergency fund is in a HYSA
“While we are talking about emergency funds, make sure that yours is in a high yield savings account so it’s not just earning like 0.08% in interest. Putting your emergency fund in a HYSA will allow that money to earn as much interest as possible and will make that money work harder for you, even while it’s just sitting there.”
Click here to check out our recommended HYSA!
Tori’s Tip #3: Revise your budget
“Next, make sure your current budget is appropriate for our current market and rate of inflation. The same $30 you used to fill up your tank of gas is not going to go as far as it did a year ago, so if you haven’t updated your budget in a few months, you may need to make adjustments.
While you’re taking a close look at your budget, I also want you to look for areas where you can cut unnecessary spending. Subscriptions are a great place to start, as chances are there are probably a couple that you don’t actively use or don’t need right now.
Finally, use this opportunity to identify your ‘non-essential’ areas of spending like dining out, getting your nails done, going to the movies, etc. I don’t want you to have to cut these as they are often those areas of spending that bring you joy and a sense of financial fulfillment, but they are important to identify so that – in the case of an emergency – you will quickly know where you can cut costs if necessary.”
Tori’s Tip #4: Continue investing if you can afford to
“Finally, I really want you to continue proactively investing if you can afford to. I know that when people hear the word ‘recession’ they often automatically think ‘stock market crash’, but a recession can actually be a great time to invest if you have a long-term investing plan!
Think of investing during a recession like going shopping during a major sale – many companies will be selling shares at a much lower price than normal which will allow you to maximize your return when the market improves.
If you’re nervous about losing money in the stock market during a recession, just remember that studies show that if you hold your shares for a one year period (even during a recession), your odds of making money on your investment is 68%. If you hold them for 10 years, those odds go up to 88%. 20 years? Your odds increase to 100%. I’d say that’s worth it.
If you want more of this kind of practical, easy to understand, scare-tactic-free information about investing, then you need to join our investing platform, Stock Market School! We created Treasury to be the comprehensive investing education platform for women so that you can confidently learn about the stock market, create an investing plan for the long-term, and navigate investing with ease, expert support, and encouragement from a community of like-minded investors.
Tori goes into even deeper detail about these recession-prep strategies (and answers a commonly asked community question and shares some amazing personal stories along the way) on a recent episode of the Financial Feminist podcast – listen in now!
Jannese Torres
Jannese is the creator and host of the award-winning personal finance podcast, Yo Quiero Dinero, and is one of our favorite financial experts and creators!
Jannese’s Tip #1: Prioritize paying off high-interest rate debt
One of the ways that the Federal Reserve is trying to slow the rate of inflation is by raising interest rates. This essentially makes it more expensive to borrow money which is meant to encourage people to stop spending.
In a recent blog post, Jannese writes “The biggest impact for most will be the price of variable interest rate debt, AKA credit card debt. A larger chunk of your payment will go towards interest as the rates increase, so if you’ve been neglecting paying them off, now is the time to put that payoff plan into overdrive. As they say, time is money, and it’s definitely going to cost you.”
Jannese’s Tip #2: Brush up your resume
One very unfortunate result of a recession is an increase in layoffs across the country. Even if you feel extremely secure in your employment, it can’t hurt to be prepared for the worst.
Jannese says, “If it’s been a while since you’ve applied for work and your resume hasn’t been updated in the last 12 months, now is a good time for a resume refresh. Make sure to include your latest role and experience, expand your network via LinkedIn, and keep an eye out for industry layoffs on message boards like TheLayoff.com and Layoff.FYI.”
Bola Sokunbi
Bola is the founder of Clever Girl Finance and is passionate about helping women take control of their money so they can live life on their own terms.
Bola’s Tip: Diversify your income
Another way to handle employment insecurity is by having multiple streams of income – that way if one source of income suddenly disappears, there are still other sources of income to fall back on.
Bola shared on her blog, “The average millionaire has 7 sources of income! Is there something you’re passionate about doing? Something you do that you get complimented on all the time? Consider turning it into a side hustle to generate some additional income.”
It is important to keep in mind that you should only take on a side hustle if you have the mental and physical energy and time available to do so. We don’t want you to stretch yourself to the point of burnout.
We know that preparing for a recession can feel overwhelming and scary, but these tips will help you survive and thrive through the highs and lows of the economy.
Remember, knowledge is power, so if you want to learn more about preparing for and navigating a recession, make sure to listen to Episode 22 of the Financial Feminist Podcast, “How to Plan for a Recession.”
