How to prepare for a recession: 7 steps to take

Don’t let economic uncertainty throw your financial goals off course. Learn what you can do today to feel more prepared and in control of your finances.

A recession can lead to everything from higher unemployment and business closures to falling stock prices and reduced government spending. But it’s important to remember that recessions are market cycles like any other – and there are always things you can do to prepare your finances for an economic downturn, whether there’s one on the horizon or not.

What is a recession?

A recession is when there is a notable decline in economic activity that lasts for more than a few months. The effects of a recession may take the form of job losses, reduced industrial production and lower consumer and business spending, among other economic impacts.

What causes a recession?

There are a few potential causes of a recession, including a global event, a financial crisis or a supply chain disruption. It could also be caused by a period of inflation, because central banks will often raise interest rates to counter inflation, leading to reduced spending and slower economic growth.

Is the U.S. economy headed for a recession? U.S. Bank experts weigh in.

How to prepare for a recession

Although your balance sheet could look gloomy during an economic downturn, there’s no need to panic. Remember that recessions come and go regularly, and there are actions you can take at any time to prepare your finances for a potential downturn. These seven steps can come in handy anytime economic uncertainty surfaces.

1. Create a plan to protect your finances

A financial plan is designed to help you take control of your money – and not just in a strong economy. Keep it updated and “stress test” it to ensure you’ll be in good shape even if difficult financial scenarios arise, such as losing your job or the markets going into a market correction or bear market territory.

Then, avoid the temptation to deviate from your plan. A decision like taking an early withdrawal from a retirement account could have significant implications for your financial well-being down the road.

If you don’t have a financial plan yet, it’s important to build one that accurately reflects your spending, savings, goals and risk tolerance.

2. Stick with your investment strategy, even during market ups and downs

An investment strategy may be just one component of your financial plan, but it’s important enough to deserve its own entry on your checklist.

Ideally, you’d head into a recession with a diversified portfolio that’s designed for your risk tolerance and the length of time you plan to stay invested. A diversified portfolio includes a mix of at least two asset classes. The most common asset classes are stocks, bonds, real assets (such as real estate and commodities) and cash and cash equivalents.

While you may need to make tweaks along the way to keep your portfolio balanced, you should plan to generally stay the course with your portfolio. If you pulled your money out of the market with stocks at their lows, you’d lock in losses and would miss out on the rebound. Plus, there are always tax ramifications to consider carefully before selling investments. 

3. Get a handle on budgeting

One of the biggest mistakes people make is not having a budget – and not knowing what they’re spending their money on. An up-to-date budget can provide the full picture you need to make smart financial decisions. It can illuminate expenses you could potentially cut, like subscription services you don’t use. It can help you determine whether you can or should make big purchases, which is especially important if doing so will add debt during a recession.

A budget can also help you find ways to pay down the debt you may already have. Maybe you have leftover cash at the end of the month that could go toward reducing your high-interest debt, for instance, or perhaps you could benefit from consolidating multiple debts.

4. Have an emergency fund

A May 2024 Bankrate survey found that 56% of respondents are uncomfortable with their level of emergency savings. If you can relate, establish an emergency fund in a money market account, high-yield savings account or other option where your money can grow and still be easily accessible.

A general rule of thumb is to save three to six months’ worth of household expenses, but how much you need really depends on your personal circumstances. For example, if you work in a high-turnover industry or are self-employed, you might to have want nine to 12 months’ worth of ready funds.

5. Prepare for a possible job search during a recession

Hopefully your job will be just fine during a recession, but downturns do have a way of destabilizing a wide swath of industries. Just in case, start or continue networking with connections to help boost your chances of finding a new job more quickly. In addition, keep both your resume and your skills up to date.

A side gig, meanwhile, can help you bring in additional income. Think of ways to earn cash by doing something you enjoy, like pet sitting, freelance writing or teaching people how to knit. There’s always a chance that a successful side job can develop into a full-time career.

6. Pay down high-interest debt

Not all debt is bad, but to keep your finances as healthy as possible, consider focusing on paying down high-interest debt, such as credit card debt and student loans. If you were to lose your job, for example, you might not be able to pay all your outstanding debts in full, so you’d want to make sure you’re only holding lower-interest ones.

7. Take measures to thwart fraudsters during a recession

Bad actors who commit financial fraud aren’t likely to stop their activities during a recession. In fact, desperate people experiencing economic hardships could join their ranks.

To protect your finances in a recession, regularly check that all the charges on your bank and credit card statements are legitimate. You can also sign up for security alerts relating to activity on your financial accounts.

Make it a habit to look over your credit reports from Equifax, Experian and TransUnion to confirm that there’s no suspicious activity there either. Putting a fraud alert or credit freeze on your reports can help prevent criminals from opening accounts in your name.

Ultimately, considering and then acting on how to prepare for a recession or economic downturn is an investment all its own. By following this checklist, you can enter a period of turbulence with confidence and a well-deserved sense of control.

Just as your life evolves, so should your financial plan. Learn how we can help you design a plan that fits your life.