5 Steps I’m Taking to Prepare for a Recession

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One does not need to see into the future to know that a recession is on its way. Read on to learn how one writer is preparing for the next recession. 

According to the National Bureau of Economic Research (NBER), a recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The next recession we enter will be the 15th since the Great Depression of the 1930s.

Recessions are painful, especially if you work in an industry typically associated with recession-related layoffs. As painful as they are, though, recessions are a normal part of the economic cycle.

Still, I’ve lived through enough of these puppies to get ready for the next one. Here’s how.

1. Reworking our household budget

While I regularly check to make sure all the bills have been paid, it’s been a while since I sat down and combed through each item included in our monthly budget. It’s been even longer since I looked for ways to protect it against recession. To prepare, I plan a “worst-case scenario” budget.

A worst-case scenario budget is our normal monthly budget, minus any extras we can live without. This includes subscription services (like some streaming services and subscription deliveries), house cleaner, personal trainer, and a portion of our miscellaneous budget. Each extra is highlighted, and while I don’t typically cut those based on rumors of recession, they do get the axe when it becomes clear that we’ve entered a recession.

2. Paying down debt

A recession is far less stressful if you know that you have enough money to cover your debt. While we don’t have any high-interest obligations, we do have some small things that I’m getting rid of. The goal is to get our bottom line down as low as possible, just in case something happens to one of our jobs.

For me, paying off debt (even a small debt), is a win-win. I’m less stressed and I’m left with a bit more to put into savings each month.

3. Boosting our emergency account

For many years, the rule of thumb has been to keep enough in an emergency savings account to cover three to six months’ worth of bills. Because I’m self-employed and my husband works in an industry that’s typically hit hard by recession, I aim for double that amount.

If you live paycheck to paycheck and that savings goal seems unrealistic, that’s okay. Decide where your budget can handle cuts, and save a little at a time. Let’s say the most you can put away each week is $20. In 12 months, you’ll have $1,040 in your emergency fund. That’s enough to buy four moderately priced tires, have your central air conditioner repaired, or cover a particularly high water bill. In other words, an emergency fund can save you from using a credit card or borrowing money to cover an emergency situation.

4. Looking for better deals

Another thing I haven’t done in some time is shop around for better deals. For example, I know that I could probably find a better rate on our homeowners and auto insurance. I purchased the new insurance in the middle of a big move last summer and instead of shopping around like I normally do, I settled on a company I’m familiar with. There’s nothing wrong with sticking with a familiar company, as long as it’s giving us the best deal.

I’ll double-down on the use of shopping apps to find the lowest prices on household necessities. Knowing how much money we’ve saved in the past, I’m inspired to use apps to save on more than grocery shopping.

5. Staying calm

The bottom line is this: Recessions don’t last forever. Historically, the average recession has lasted 14 months, while the average period of economic expansion has lasted 47 months. The average recession has reduced economic output by 2.5%, while the average expansion has increased GDP by nearly 25%.

Throughout the years, our portfolio has enjoyed its largest gains in the months following recessions and bear markets. My plan is to remain calm and stay the course. While I am checking our portfolio to ensure that our investments are diversified enough, I won’t change the way we invest. Recession is the time to get in on the good deals to be found when others have panicked and pulled their money out of the market.

Like everyone else, I’m not looking forward to the next recession — whenever it may arrive — but I am confident that I’ll be as prepared as I possibly can be.

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