Preparing for a Recession and its Impact on You

While we can’t be certain that a recession will occur in 2025, the possibility is on a lot of people’s minds. Living with that kind of uncertainty can feel there’s a dark cloud hanging over your head. Maybe you’re worried about your job, your mortgage, your retirement savings, or even just how you’ll keep up with everyday expenses if prices keep climbing. If any of that sounds familiar, now’s a good time to take a look at your finances and start preparing. 

The good news is that there are practical steps you can take to make you feel more in control of the situation. While you can’t control a recession, you can do your best to prepare for one. In this article, we’ll walk through what a recession actually is, what you should (and shouldn’t) do during one, and how to prepare your finances so you’re ready – just in case.

What is a Recession?

A committee of economists at the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” This group is responsible for identifying when a recession starts and when it stops. Recessions can also exist when the gross domestic product (GDP), the total economic output of the country, declines for two quarters in a row.

Although many people wish they could predict the future, accurately identifying the timing or severity of a recession is extremely difficult. The NBER reports that past recessions have lasted anywhere from two months to several years. The recession in 2020, triggered by the COVID pandemic, was shorter in duration and less severe compared to previous recessions. Economic activity decreased and unemployment rates increased during that period, but the economy recovered in a relatively short period of time. 

However, the 18-month period during 2007 to 2009, has often been referred to as the Great Recession. Millions of individuals experienced severe financial hardships before the economy started to recover. This economic downturn was marked by a hit to the housing market where mortgage-backed securities plunged in value. In response to this crisis, the government put several new monetary and fiscal policies in place and introduced stimulus packages that benefited consumers and many that were unemployed. The opinions of which actions proved to be the most helpful are mixed. Fortunately, the period following the Great Recession experienced over a decade of economic expansion. For those individuals whose experience was less severe, the difference was in their preparation.

How to Prepare for a Recession?

Economic recessions can impact individuals in various ways. Although predicting the future is difficult, there are proactive steps you can take to better prepare for a potential recession. Cathleen Ringo, a Senior Vice President and Senior Regional Wealth Advisor for SouthState Private Wealth, recommends these five strategies to plan for uncertain times.

Have an Emergency Fund in Place

Build your emergency fund before you need an emergency fund. In other words, save what you can while you can. A general guideline for a proper emergency fund is to have available in cash at least three to six months’ worth of expenses. If you don’t have this amount set aside yet, then make this a financial goal. Put as much cash into this savings account as possible, because you will need access to it if your income stream is halted.

If you have not reached this goal yet, consider ways you can make some extra money. This may be the perfect time to pursue that side hustle you have been considering. Any additional income you can earn now should be directed to your emergency fund.

Ideally, you won’t need to use your safety net, but losing your job and living on a reduced salary is certainly a valid reason to access these reserves. If you find yourself in that situation, then be sure to replenish your fund as soon as possible. When the next emergency arrives, you want to make sure you are equally prepared.

Adjust Your Budget and Spending Plan

You may need to adjust your budget in preparation for a recession. Begin by making sure you have a thorough understanding of exactly how you are spending your money. Create a detailed list of your monthly expenses, including your mortgage or rent, utilities, groceries, childcare costs, medical care, automobile costs, insurance premiums, debt payments, and any other expenses you pay monthly or annually. When you total these expenses, determine whether you are spending more than what you bring home in income every month.

You may find it necessary to reduce your financial commitments. Start with prioritizing your essential expenses to determine the minimum amount you can spend each month and then begin to identify areas where you can trim back on costs. Shop around for insurance rates, compare cell phone plans and eliminate unnecessary subscription services. These non-essential expenses can add up quickly and can include items such as dining out, entertainment, delivery fees, and clothing. When you can separate your needs from wants, you can more easily find ways to reduce your overspending.

 

Manage Your Debt and Credit Cards

If you have any debt, such as high-interest credit cards, now is the time to get it under control. The faster you pay off those balances, the faster you will stop spending money on interest fees and be able to lower your monthly expenses. If paying off the balances is not a realistic option for you at this time, you could consider transferring existing credit card balances to a card with a 0% APR offer on balance transfers.

Just as important as paying off any existing debt is taking care of your credit worthiness itself. In financially challenging times, you may need to lean on available credit for help in covering unexpected expenses. Having good credit will help you in the event you need to borrow money, and it will help you receive the best terms, such as lower interest rates on loans or credit cards.

Evaluate Your Real Estate

Housing costs are often the largest portion of an individual’s monthly expenses. If you own your home, prioritize any necessary maintenance. Neglecting maintenance issues can result in more costly repairs in the future and those could be more difficult to pay for during a recession.

If your income does decrease, the money in your emergency fund can help you stay current on your monthly mortgage payments or help cover those unexpected maintenance costs. In an emergency or as a last resort, a home equity line of credit (HELOC) could provide a temporary source of funds. However, it is important to be aware of the debt you will take on by accessing your HELOC. You will have to repay any withdrawals with interest. If considering this option, applying for a HELOC while you have a steady income history will increase your chances of qualification.

Protect Your Investments

One thing you can count on during a recession is increased stock volatility as investors respond to every single fluctuation in the market. It is very possible that your portfolio’s value will decline, but when the price of quality assets declines it doesn’t necessarily mean those stocks are less valuable. What it does mean is that current trading could be happening at less valuable prices. When a recession comes to an end and the economic recovery begins, your stock values may recover right along with it. If you have a longer investment horizon, in many cases you may benefit from leaving your portfolio untouched. This allows you to remain invested in the market and well positioned to receive gains during an eventual recovery.

On the flipside, you may want to consider taking advantage of investing opportunities that present themselves during a recession. Price matters; if you are able to buy quality stocks at lower prices, you have the potential for higher returns

What Not to do During a Recession

Nearly every generation has experienced a recession or some form of economic challenge. The severity of each varies greatly, but the lessons learned during previous recessions can help us avoid the most common pitfalls. In addition to following the strategies above to prepare for a recession, Cathleen shares these reminders about what to avoid during an economic downturn.

Resist the desire to tap into your retirement funds - This is not the time to liquidate your hard-earned retirement savings.

• These investment accounts are structured to achieve long-term growth through the accumulation of compounded earnings. Any withdrawals you make now will reduce the potential for future growth, and early withdrawals are typically subject to penalties and income taxes.
• Instead, seek advice from a wealth management advisor. They can help you balance the emotions you are experiencing during challenging times with objective guidance to secure your financial future.

Don’t take your job for granted - A common indicator of recessions is high levels of unemployment. As secure as you may feel now with your current career, it may be a good idea to prepare a backup plan in the event you face a layoff.

• Make the effort to reconnect with other professionals in your industry. Having established relationships within numerous organizations could be an advantage in securing a new job.
• Update your resume to include your most recent work experience along with any training and development you have gained in your current position.
• Consider diversifying your income with freelancing, a part-time job or other income-producing activities. Adding an extra source of income can provide financial security in the event of a job loss and expedite the growth of your emergency fund while you are still employed.

Final Thoughts: Don’t Panic

All the preparation in the world will not eliminate the fact that economic downturns bring significant challenges and stress. Having lived through a recession herself, Cathleen has a final piece of advice to share, “Don’t panic.” Emotion-based decision making can make it more difficult to see the full picture and objectively assess the situation. Instead, look for the opportunities to put better spending habits into place, to expand your employability with new skills or, if able, to take advantage of new investment prospects. Cathleen emphasizes our history of resilience. Effective planning and disciplined financial strategies will help us navigate any challenging times ahead.

All content contained is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed are the opinions of the particular author only. 
 
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