Insider’s experts choose the best products and services to help you make informed decisions with your money (here’s how). In some cases, we receive a commission from our partners, however, our opinions are our own. Terms apply to offers listed on this page.
- During a recession, nothing is more valuable than readily available cash.
- I recommend saving for foreseeable expenses like car repairs or medical bills.
- You will also want to pay off and consolidate your debts to lower your payments.
We may not be able to control the state of the economy; however, we can control our level of preparedness.
In times of financial difficulty, cash and liquidity are king. Having easy access to cash during a recession can help you avoid getting into serious debt.
No one can predict if we will enter a recession or if they will lose their jobs. However, it is essential to prepare yourself for this possibility.
1. Tighten your budget
With a potential recession looming, now is a good time to assess your budget. Create a priority list to determine needs versus wants, keep all your needs on the list, and rank your wants. Plan to keep only your top three to five wants and cut out the rest.
2. Save for predictable expenses
Additionally, consider using the zero-based budgeting method where every dollar earned has a use. I also recommend creating sinking funds — separate savings pots — for priority, predictable spending. For example, car maintenance, medical expenses and planned vacations.
These are annual expenses that you can safely plan for. Save a predetermined amount each month in the various sinking funds. This way, you can minimize the need to dip into your emergency fund for any minor medical or automotive emergencies that may arise. I recommend that you keep your sinking funds in an FDIC-insured high-yield savings account.
See insider picks for the best savings rates »
3. Pay off high-interest debt and consider consolidating
High-interest debt can take a toll on your free cash flow. Consider using any extra income to pay off your high-interest debt (i.e. credit card debt).
If you have a good credit rating, it may be worth consolidating your credit card debt into an unsecured (unsecured) personal loan. This can give you a significantly lower interest rate, allowing you to pay off debt faster. When choosing a personal loan provider, remember to consider the origination fees charged for consolidation.
Pay off credit card debt faster with Tally »
Another option to consider is a balance transfer credit card that offers 0% APR for a set promotional period. This option only makes sense if you have good credit and plan to pay off most or all of the credit card balance during the promotional period.
When comparing balance transfer credit cards, keep in mind that most balance transfer cards come with a one-time balance transfer fee of 3% to 5% of the transferred amount. Be sure to calculate if the interest you’ll save is worth the fees.
4. Land a side gig or part-time job
Recession or not, it’s always a good idea to earn some extra income. This income can help you achieve a variety of goals, such as paying off debt faster, building an emergency fund, and creating additional cash flow.
Consider using your current skills to start a side job such as consulting, creating an online course, or writing a blog. Or if you have extra time, consider part-time seasonal work.
5. Boost your emergency fund
One of the most important ways to prepare for a recession is to build a strong emergency fund. Typically, personal finance experts recommend that you save three to six months of expenses in an emergency fund. Personally, I recommend that individuals save six to twelve months of expenses. To determine an appropriate amount to save, you need to consider your family needs, job stability and fixed expenses.
At first glance, this amount may seem daunting and overwhelming. However, if you save a small amount each month, you will slowly progress towards your goal. To make sure your money is working for you but still easily accessible, I recommend saving your emergency fund in an FDIC-insured high-yield savings account.
Also, if you’re responsible for your credit cards and pay the bill every month, consider using cash back to help you build your emergency fund faster. Or designate the money on your side for emergency saving.
6. Delay big purchases
In an economic downturn, you want to have as much money as possible. If it’s not absolutely necessary, it may be best to delay any major purchase. Big purchases, like a car or a house, usually require you to pay a large lump sum or make a large ongoing payment. This would reduce your free cash flow, putting you at major risk in the event of a recession. Getting into debt before a recession is very risky and should be approached with caution.
If you are comfortable with your financial situation, have job stability, and have cash reserves, major purchases may still be feasible for you. But if you feel financially vulnerable to the possibility of an economic downturn, it’s worth keeping more cash on hand. By creating a financial cushion for yourself, you can face the future of a possible recession with more confidence.