Recessions come and go. Here’s how to prepare for the next economic downturn.
Image source: Getty Images
Just ask the experts; they’ll all tell you something different. Some say we’re awaiting a recession, while others believe we’ve managed to skate by without the highly predicted economic downturn. And recently, there have been others who claim there was a recession, but none of us seemed to notice. If economic downturns weren’t so serious, the sincere, differing opinions would almost be funny.
Almost.
Here’s a general truth about recessions: They come, and they go. There have been 13 recessions since World War II, and while each one felt pretty horrible, they each ended with a rebounding economy.
The point is, whether another recession is right around the corner or not, we should all be ready when it arrives, even if it’s years down the road. These seven steps are designed to ensure that a recession can’t yank the financial rug from beneath you.
1. Count on it, and save for it
The rule of thumb you have likely heard more times than you would care to remember is to have enough put away in an emergency savings account to cover three to six months’ worth of nondiscretionary expenses. A nondiscretionary expense is a bill you have to pay whether you want to or not. Rent or a mortgage is a nondiscretionary expense, as are utility bills, car payments, and other expenses you must pay each month.
2. Respect debt
It’s so easy to let debt pile up — a credit card bill here, a new car payment there. We are not a society that emphasizes the value of delayed gratification or talks enough about the emotional toll of too much debt.
Debt can also mean the difference between riding out the next recession and sputtering our way through it. Use this time to create a debt paydown plan.
And if you find yourself thinking, “Hey, I thought you just told me to build an emergency savings account,” there’s no reason you can’t work on both at the same time. Let’s say you rework your monthly budget (and you should) and cut out the expenses you can live without, like expensive memberships and subscriptions you no longer use. Divide any money you save by cutting those expenses by two, with half going toward your debt and half into savings each month.
I won’t blow smoke here and say that saving money while paying down debt is easy. Heck, even making cuts to a budget is tough. I’m just saying that it’s possible.
3. Adopt mindful spending habits
Let’s imagine that you’re still sitting on the sofa your grandmother allowed you to “borrow” when you left for college. However, you don’t currently have money in the bank to purchase one that doesn’t smell a little like Grandma’s cat.
You’re walking through a department store with a friend when you realize it has a great financing offer on furniture. Being mindful of your spending habits means examining what the true cost of new furniture at this moment might be. After all, even with a great financing offer in place, making the purchase means going further into debt.
Before you buy anything — no matter how small — consider whether it’s something you want or need and whether you can hold off until you have the cash to pay for it.
4. Come up with a “Plan B”
Decide what you’ll do if things get too financially tight for comfort during the next recession. For example, if you live alone, will you take on a roommate, get a side gig, or both? You may never have to implement Plan B, but it’s a good idea to have ideas in your back pocket, just in case.
5. Look into a home warranty
A study by Angi found that Americans spent just shy of $2,000 on emergency home repairs in 2022. The important thing to remember is that $2,000 is an average. The total can be much higher. It’s impossible to know when the air conditioner is going to stop working, or the water heater will create a pool in the basement. If it should happen in the middle of a recession, it’s an added stress you can do without.
A home warranty may be the answer.
On a personal note, there are many (many) items in my monthly budget that I would give up before allowing my home warranty to lapse. The number of times we’ve had to use it over the years is enough to convince me that it’s been a good investment.
In fact, an appliance repair person will be here soon to put a new heating element in our dishwasher. I don’t have to worry how much it’s going to set us back because all we’re responsible for paying is a small per-incident deductible.
6. Maintain your wheels
Although new car prices are on the decline, interest rates are still higher than they’ve been in years. Since now may not be a great time to finance a car, treat your vehicle as though you plan to keep it for 10 more years. That means not skimping on repairs or postponing maintenance. Spending some money today could save you big bucks later.
If you need a car to get to and from work, but yours is no longer safe, look into buying a used car rather than a new one. I’m not suggesting you buy a hoopty that even your golden retriever is too embarrassed to be seen in. Look for a newer model used vehicle. Preferably one that comes with a sweet warranty.
While the price of used cars shot into the stratosphere during the pandemic, they’re also on the way down. According to Car and Driver, analysts expect the price of used cars to drop by 10% to 20% this year.
7. Don’t lose your nerve
Although recessions come and go, there are those who act as though each recession is the first ever. They run around like they’re being chased by a Demogorgon, sure the world is about to end.
Oh, and they sell off their investments.
By holding steady, your fund manager can add to your portfolio by buying great stocks at a bargain price. You may not be impressed with it at that moment, but you will once the recession passes and you watch the value of your portfolio increase.
No matter when the next recession occurs, there’s no downside to preparing for it now.
Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025
If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Dana George has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
