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July 10, 2024 / Warren Hurt
Preparing for a recession

Preparing for a recession

You might have heard that some economists are warning of a recession. It’s difficult to know what to expect and how it will affect you, but here are some steps you can take to make sure you feel financially secure during a recession.

Job Security

When a recession hits, you might worry more about your job. Employers sometimes lay off people as a business makes less profit, and new jobs could be harder to find. But if you prepare for the worst, you can better navigate the financial blow from a sudden loss of income.

Your first line of defense is to have a well-stocked emergency fund. Your emergency fund should be large enough to cover your basic expenses for three to six months. You’ll want to keep your emergency fund somewhere secure and easy to access. A high-interest savings or money market account is usually the best place.

You can also apply for weekly unemployment payments provided by the government to help people who have recently lost their jobs. The payment is based on a percentage of your previous wages and varies from state to state. It is meant to be short term and requires proof that you are actively seeking new employment.

Retirement AccountGraphic of people putting money into oversized savings and budget jars.

Recessions can have a big impact on the money you have set aside for retirement. It might be tempting to use that money for current expenses, but these are the funds you will need to live on when you may no longer be able to work. Tapping retirement accounts early can result in penalties and taxes you may not be expecting.  If retirement is still a way off, just sit tight. Remember, money spent in a recession is money that isn’t there during a recovery. If retirement is close and you are concerned about your retirement assets, consider meeting with your retirement fund custodian or financial advisor to go over your options.

No investment is risk free, especially during a recession. It might be tempting to take the money out of your retirement account early, but this is generally not a good idea. You can be penalized for the money you take out early. Some retirement plans allow you to borrow from the plan. This is usually a better option than early withdrawal, but borrowing still has drawbacks. As a general rule, retirement withdrawals should be your last source of liquidity if you are younger than 59 1/2 years old.

Budget and Debt

During a recession, you might see higher rent, gas prices, or costs overall. Having wiggle room in your budget will prepare you for these price hikes. If you can handle prices rising 10%, you'll be prepared for most situations.

When looking at your budget, reducing your debt will make a big difference. The lower your debt, the more flexibility you have if things get tight. During a recession, financial flexibility is the goal. The lower your monthly financial obligations and the bigger your emergency fund, the better. You don’t have to eliminate all your debt to handle a recession, but the more you do, the easier it will be.

If you have your debt under control, you might have access to a large amount of credit, but this shouldn’t be a replacement for an emergency fund or flexible budget. Relying on debt to get you through a difficult financial situation only sets you up for more financial difficulties if the tough times last longer than expected.
Preparing for a recession also prepares you for other financial hardships. The stronger your financial foundation, the easier a recession or any unexpected financial challenge will be. Strengthening your financial position also allows you to take advantage of opportunities if the recession is mild or fails to materialize.

 

This article was drafted with the aid of AI. Additional content, edits for accuracy, and industry expertise by Warren Hurt, chief investment officer for F&M Trust.

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