How to prepare for a recession

The economy is cyclical, alternating between periods of growth and contraction—and recessions are an inevitable part of the process. Understandably, though, the fear of a looming recession can be upsetting for many. The good news is you can start preparing for a recession as soon as possible. With proper planning and discipline, you should be able to financially weather the storm and maintain peace of mind during challenging times.

If you’re worried about the state of the economy, you’re not alone. “There’s definitely an increased level of concern about a looming recession,” says Dennis Shirshikov, head of financial education at a virtual tutoring company and adjunct professor of finance. “This heightened anxiety stems from several factors, including recent market volatility, rising inflation rates, and geopolitical uncertainties disrupting global supply chains. People remember the impact of the 2008 financial crisis and are wary of repeating past mistakes.”

Preparing for a recession requires careful planning and proactive measures. Here are some practical steps to help you stay ready. Consider your primary concerns and challenges, then tackle these ideas in an order that makes sense to you.  

Build an emergency fund

One of the first steps consumers can take to prepare for a recession is to create an emergency fund. “An emergency fund is a financial safety net during uncertain times,” Shirshikov explains. “It provides a cushion that can cover unexpected expenses like medical bills or car repairs, and it’s especially critical during a recession, when job security might be at risk.”

It’s typically recommended to have three to six months’ worth of living expenses saved up. However, in today’s unpredictable economy, Shirshikov recommends aiming for at least six to nine months’ worth of expenses. With that amount in savings, if you lose your job, you can buy yourself some time to find not just a new one, but the right one, he says.

If your employment is stable, that emergency fund will be ready and waiting if you experience another significant financial blow. Unforeseen expenses, such as home maintenance needs or medical care, can happen with little to no warning. Being able to pay for them in cash kept in an interest-generating savings account can help you avoid turning to high-interest debt to cover costs. 

Savings strategies on a tight budget

Consumers with limited discretionary income might struggle to set money aside each month to build a solid emergency fund. Shirshikov says saving will require creativity and discipline if your budget is limited. “Start by automating small, regular transfers into a savings account. Even as little as $10 a week adds up over time and gets you in the habit,” he says. “And look for nontraditional ways to boost your savings, such as selling unused items online or picking up a flexible side gig.”

Start saving with no minimum balance

Learn more

Discover Bank, Member FDIC

If you struggle to find room in your budget to make regular contributions to an emergency fund, you can also build it by using windfalls whenever possible. Tax returns, holiday gifts, and work bonuses are all great examples of influxes of cash that can help you build your emergency fund without putting strain on your regular budget.

For those working to pay off debt, it can be difficult to determine if you should put most of your financial resources toward that goal or focus on an emergency fund instead.

“This is a common dilemma, but it’s essential to strike a balance between the two,” Shirshikov says. “Building an emergency fund should be your first priority, because it prevents you from accruing more debt in the event of an unexpected expense.”

Reduce nonessential spending

One way to leave some wiggle room in your budget is to cut back on your nonessential spending. This makes it easier to accomplish goals that help in preparing for a recession.

Reducing nonessential spending starts with thoroughly reviewing your expenses to identify areas where you can cut back. “This might involve canceling unused subscriptions, dining out less frequently, or opting for generic brands over name brands,” Shirshikov says.

Subscription services are an easy place to start making cuts. Consider canceling streaming subscriptions and recurring delivery services like sample boxes. If you miss having them, you can always add them back into your rotation. At the very least, you’ll have saved some money for a few months. On the flip side, you might realize those subscriptions don’t add enough value to your life to justify a fixed spot in your monthly budget.

Pay down high-interest debt

Many people struggle financially with high-interest debt, and fears of a recession can add even more pressure.

Research your credit card options

If you aim to pay off debt quickly, Shirshikov advises you to consider consolidating your high-interest debts into a lower-interest loan or balance-transfer credit card. This can reduce the interest you pay over time and simplify your payments.

The key is to find a loan or credit card with a lower interest rate than the average rate of the debt you want to consolidate. If possible, find a balance transfer card with a low (or 0%!) introductory APR that allows you to enjoy an interest-free period while you pay off your debt. If you can make several payments before the regular interest rate kicks in, more of your hard-earned cash can go toward paying off the principal balance—not the interest.

Make sure you’re cognizant of two things: whether you’ll be able to pay significant portions during the introductory period, and if the new card’s regular interest rate is roughly equal to or lower than the other card(s) you’re holding.

In general, Shirshikov also suggests increasing your monthly payments beyond the minimum required payment amount whenever possible. Extra payments exclusively applied to the principal reduce the principal faster, which also helps you save on interest.

Assess your debt payment strategy and timeline

If you’re working to pay off debt, it helps to have a clear plan in place, which is why both the debt snowball and debt avalanche repayment methods are so popular. With the debt snowball method, you focus on paying off the smallest debt first, then move to the next-smallest, gaining momentum and motivation with each paid-off account. The debt avalanche method prioritizes paying off debts with the highest interest rates first, saving more money on interest over time.

If the goal is to become debt-free as quickly as possible, Shirshikov advocates for the avalanche method. “This approach makes mathematical sense and can save you money in the long run,” he says. “However, the debt snowball method can provide psychological wins that motivate you. For individuals who need immediate gratification to stay on track, the snowball method might be more effective.”

Be mindful of your saving and spending habits

To stay on track and save some money, Shirshikov recommends regularly reviewing your budget. Doing so keeps you aware of your financial habits and highlights areas for improvement. “By consistently tracking your income and expenses, you become more mindful of where your money is going, which naturally leads to better spending decisions,” he says.

Another smart habit is to practice mindfulness when shopping—online and in-store. Online shopping makes it easier than ever to spend money, and emotions are often to blame. A bad day can quickly get better with the right purchase. At least, it feels that way.

Mindfulness while shopping helps you make intentional, thoughtful purchases, reduce impulse buys, and keep your spending aligned with your needs and budget. To practice mindful shopping, Shirshikov suggests a cooling-off period for purchases. By waiting 48 hours before buying an item, you can ensure it truly serves a purpose or brings long-term value. It also gives you a chance to separate your emotions from the purchase.

Reevaluate your investments

Investing always comes with risk, so it’s no surprise that many people become more cautious when a recession seems possible.

According to Shirshikov, now’s a great time to reassess your investment portfolio. “During potential economic downturns, it’s crucial to ensure your investments align with your risk tolerance and long-term goals,” he says. “Diversification becomes even more important. Consider allocating assets across various sectors and asset classes to mitigate risk.”

“Additionally, focusing on investments with strong fundamentals and steady cash flows, like certain blue chip stocks or government bonds, can potentially provide some stability,” Shirshikov says. “Consider consulting a financial advisor to discuss your specific situation.

Look into low-risk savings vehicles

If you’re not comfortable taking on high risk while preparing for a recession, you can focus on saving to keep your money safe while still allowing it to grow. The key is to store your funds in a high-yield savings account, certificate of deposit (CD), or money market account. These bank accounts and investment products are low risk and can help your savings grow faster than if kept in a traditional savings account. Here’s how they work:

• High-yield savings account: This offers a higher interest rate than a traditional savings account, so you can earn more on your balance while keeping funds accessible for withdrawals when needed.
• CD: A CD locks in funds for a set period (at Discover®, the terms range from three months to 10 years) at a fixed interest rate, sometimes higher than regular savings accounts. This is a secure way to earn interest. Be aware, though, that there can be penalties for early withdrawals, making your cash less accessible.
• Money market account: Combining the benefits of savings and checking accounts, a money market account offers higher interest rates while providing access to your funds via checks or debit card transactions. Be aware, though, that they may have limits on withdrawals and higher balance requirements. All in all, a money market account is a flexible and secure choice for earning interest while keeping your money relatively accessible.

These returns may contribute to your income, and the more you save, the more you stand to earn in interest. If you start saving early, you can supplement your emergency fund and have a stronger base to generate additional interest income should you ever face a job loss or other financial challenge.

Diversify income streams

Relying solely on your full-time job for your income can feel uncertain, especially when it’s unclear if a recession is coming in the next months or years. If you’re worried about the possibility of a layoff, diversifying your revenue streams can provide extra security. A side hustle or two can be a practical way to achieve this.

“Diversifying income streams can provide financial stability during uncertain times,” Shirshikov says. “Side hustles like freelancing in your area of expertise, tutoring, or even renting out a spare room can generate additional income.”

Consider the possibility of job changes

Job loss is a common worry when a recession looms. While you can’t predict or control a layoff, preparing for a potential job change and adjusting your budget now can help shield you from financial strain if unemployment does occur.

“If you’re worried about job security, it’s wise to tighten your budget now,” Shirshikov advises. “Prioritize building or increasing your emergency fund to cover essential expenses for an extended period. Cut back on discretionary spending and delay major purchases. Also, consider reviewing your health insurance options and other benefits that might change if you’re laid off.”

Upskill to stay competitive in the employment market

Being prepared for a potential job search is always a good idea. While finding a job in a recession can be challenging, it’s still achievable.

How to stay competitive? Shirshikov suggests continuously upgrading your skills. “Invest time in professional development, whether through online courses, certifications, or workshops relevant to your industry,” he says. “Networking is also crucial. Attend industry events—even virtual ones—and engage with peers on professional platforms like LinkedIn.”

You can identify gaps or shortcomings in your skill set relative to the latest trends and demands in your field by reviewing job descriptions for positions you’re interested in, seeking feedback from colleagues or mentors, and analyzing your recent performance.

After identifying potential growth areas, pursue learning opportunities such as online courses, webinars, and certification programs that help you build in-demand skills and enhance your résumé without making a major financial commitment.

How to prepare for a recession: The bottom line

Taking steps now to financially prepare for a recession can make it easier to navigate job loss, rising consumer goods prices, and general economic uncertainty. Focusing on building an emergency fund, paying off debt, making yourself more competitive in the job market, and having a clear financial plan to work toward can help you avoid financial struggles during a recession—and give you some peace of mind that you can tackle any financial challenges that come your way.

Looking to prepare your financial life for a recession? Consider a Discover Online Savings Account so your money can start working hard for you.

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.