Oct 27, 2025
The best way to prepare for a recession may be to understand what a recession is and how it might affect your personal finances. Other steps include checking your budget more often, adding to your emergency fund, and paying off or consolidating your higher-interest debt with a lower-interest loan. If an economic downturn could put your job at risk, you may want to step up your networking efforts and build your skills.
A recession is an economic downturn that occurs when there is a “significant decline in economic activity that is spread across the economy and lasts more than a few months,” according to the National Bureau of Economic Research (NBER), the nonpartisan group that sets the official designation.
An economic recession may not always be easy to pinpoint. Some economists think of a recession as reduced economic growth in the country that lasts for at least two consecutive quarters, or six months.1 In its definition, the NBER explains the duration of any recession as “the period between a peak of economic activity and its subsequent trough, or lowest point.”
For most consumers, the official definition is less important than how a recession affects them personally. The most talked about concern many people may have is unemployment. Because a recession may mean lower demand for products, businesses may cut back on production. This can lead to layoffs.2 Unemployment may lead to cuts in household income which can cause people to seek to control or reduce living expenses. As a result, demand for products and economic activity may go down even more.
Historically, the economy moves in a cycle over the long term—from expansion to contraction, back to expansion, and so on. These periods of economic growth and recession, with their impact on inflation and interest rates, ebb and flow.
To help increase or stabilize economic activity, the Federal Reserve may lower interest rates. By making it less expensive to borrow money, lower rates can lead to more purchasing and greater economic activity. Lower rates are also partially intended to help ensure enough economic growth to keep unemployment levels low.
We can’t promise that following these steps will recession-proof your finances. But they could help you prepare for any economic cycle, fast-track your financial goals, and potentially reduce your stress by giving you a feeling of more control.
Any time is a good time to take a close look at your finances. If you’re concerned about a possible slowdown, doing it sooner may help you feel better. Here’s a list of what you can review:
Reviewing your credit score annually and keeping an eye on it regularly is never a bad idea. If you do need to borrow in an emergency, knowing where you stand ahead of time could help you identify options more quickly, for example. And seeing what is on your credit history may help you identify debt you might be able to reduce.
Your budget won’t work if you expect to “set it and forget it.” Review your budget regularly. Even if you don't need to cut expenses now, you could note what you might be able to cut if your finances are affected by a recession.
You might identify, for example, where you could cut back on living expenses. If you’re part of a two-income household, see if you could get by on only one of those incomes. If you can, you might look for ways now to add to your emergency fund. Or maybe hold off on big purchases so you will have cash in the bank if your situation changes.
Once you have an understanding of your income and expenses, take a look at your emergency fund, the savings you have set aside for financial emergencies. Experts recommend maintaining an emergency fund that can cover at least 3 to 6 months of your regular, essential living expenses (housing, food, transportation, healthcare, etc.)
Do you have one? If you don’t, take a deep breath. You’re not alone. According to Bankrate, nearly 25% of Americans aren’t prepared for financial surprises.
So, could you start to build your emergency fund now? Take small steps to save money and put what you’re not spending into a dedicated account.
If interest rates fall due to a recession, it could make sense to take advantage of a lower annual percentage rate (APR) to pay down higher-interest debt. One way to do that is by consolidating it into a loan with a lower fixed rate.
This could help you save on interest in two ways: by potentially paying a lower rate overall and by paying the loan off early without any penalty if things improve. And, you could put any dollars you save into your emergency fund.
Be sure to look for a lender that doesn’t charge fees or prepayment penalties. At Discover® Personal Loans there are no fees of any kind.
Continual networking can help you stay in the know about changes in the marketplace, and get ready to make a switch if necessary.
You could also look for a second job or side hustle. The extra income might help bridge the gap if you are laid off from your job.
It’s normal to worry about a recession. But it may help to remember that recessions are a part of every economic cycle. And they aren’t always severe or long-lasting.
Many people find that talking to a financial professional can help relieve some of their stress. Recession or not, a certified financial planner can help you set goals and track your progress. For example, if you don’t know how you will cope if you lose your job, they might be able to help you come up with a plan.
If you already work with a financial planner, you could set up a call to explore “what ifs?” They can help you figure out how much emergency savings you should try to have. This typically depends on your cost of living and income.
Playing out a few “what if” scenarios may show you how long you can get by on your emergency fund. It also could help you get ready to act fast and adjust spending if you need to.
Even if you check your financial picture regularly, it’s still a good idea to plan what you might do if your income takes a hit.
Whatever happens, you could take steps now to trim spending, add to your emergency fund, and pay down debt. You can always ask a financial professional if you’d like more specific advice. If a slowdown does come, you may find relief knowing you’ve taken steps to lessen the impact.
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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, a division of Capital One, N.A., (Discover) or its affiliates.
