How to Prepare for a Recession: 10 Steps

Lyle Daly
Natalie Taylor, CFP®, BFA™
How to Prepare for a Recession: 10 Steps

Recessions are uncertain times, and it’s normal to feel stressed when it seems like one is on the way. But if you budget well, follow smart spending habits, and plan ahead, you can weather a recession with minimal disruption to your finances and way of life.

And remember that not all recessions involve economic collapse. There are recessions and then there are recessions.

In this guide on how to prepare for a recession, we’ll cover how they happen, what to expect, and how to navigate them.

What Is a Recession?

A recession is a significant decline in economic activity that lasts for several months or longer. While a bear market is simply a decline in investment prices, a recession involves a drop in GDP  and a rise in unemployment. A severe and prolonged recession is known as a depression.

Recessions can’t be predicted with complete accuracy. Economists attempt to predict them based on economic indicators, with varying degrees of success. For example, few saw the Global Financial Crisis coming. However, there are usually warning signs, like there were throughout 2022. These indicate that there’s an above-average probability of a recession.

What to Do in a Recession

When a recession looms on the financial horizon, there are several steps you can and should take to get ready. First, work to understand how the recession will affect you. Then boost your emergency fund, analyze your spending, and pay off high interest debt for better cash flow.

1. Understand How a Recession Affects You

Since a recession impacts the economy as a whole, most people are at least somewhat affected. Here are the most common ways that a recession could affect you:

  • You could lose your job, have your hours cut, or experience a pay freeze.  Company revenues tend to drop, so raises become scarce. Unemployment rises during a recession. Even if you keep your job, your employer may need to reduce your hours to cut costs or eliminate bonuses for a period of time.

  • It’s harder to get a loan. Lenders reduce their exposure during recessions and become more selective about the loan applications they approve. This makes it more difficult if you need a mortgage, auto loan, or personal loan.

  • Your investment portfolio may experience more volatility. Stock prices normally drop during a recession or a broader economic collapse, which affects your investment accounts.

  • A job loss could lead to losing insurance coverage. If you had employer-sponsored health, disability and/or life insurance coverage, losing your job could also mean losing your coverage.

2. Tighten Your Budget

When times are good, it’s easy to relax with your budget. Don’t wait until a recession hits to fix that. Review your budget now to see how you’re managing your money and where you can improve. This can help you spend less and save more, putting you in a better position in case you go through a loss of income.

Analyze Your Spending Habits

Also, take a look today at the areas where you could reduce your spending if you had to. That way, you’ll have a plan of action in place if you lose part of your income.

Go over all your expenses to see where you can save money. Subscription services are a good place to start. People often continue paying for these even when they’re hardly using them anymore. Also, look for discretionary spending you can reduce. For example, if you go out to restaurants every weekend, swap in low- or no-cost alternatives, like an at-home movie night.

Pro Tip: To save time while budgeting, Monarch Money lets couples track their income, spending, and net worth, even across multiple accounts. Knowing how to prepare for a recession includes using the right tools.

3. Beef up Your Emergency Fund

If you lose your job, a stout emergency fund can help you cover your expenses without going into debt. A smart goal is to have between three and 12 months of take-home pay in your emergency fund, depending on your financial situation.

If you don’t have this fully funded yet, put as much of your extra money as possible towards it. A large emergency fund gives you more financial security and peace of mind especially in times of uncertainty.

Emergency Fund Recession Example

Let’s say you and your partner each bring home $5,000/mo for a total of $10,000/mo. With a 6 month Emergency fund of $60,000, you would have enough in savings to cover expenses for an entire year if one of you lost your job. 

And if you trim your expenses, your emergency savings could last even longer. That’s the power of having a strong emergency fund.

Learn more in our article: How Much Money Should I Have in My Emergency Fund?

4. Diversify Your Income Streams

When you have multiple income streams, you’re not reliant on a single job or client for all your income. That means you’re better protected against a job loss, because it won’t bring your income down to zero. Consider taking on freelance work, starting a side hustle, or adding a part-time job.

If you’re already salaried, this advice is far easier said than done. So — if you’re already in a highly compensated and highly competitive position, the most prudent action may be to double down on your current job to reduce risk of getting laid off.

Pro Tip: If you do life with a partner, you won’t have to weather a recession alone.  Understanding financial planning for couples is a big part of knowing how to prepare for a recession.

5. Pay off High Interest Debt

If your Emergency Fund is already well-stocked, paying off debt, especially high interest debt, can help reduce your debt payments in the future which can be especially important when preparing for a recession. Debt payments add to your monthly bills at a time when you’re trying to keep those to a minimum. Make a plan now for how to pay off credit card debt and any other high-interest debt you have.

High Interest Debt Example

Imagine you have $5,000 in credit card debt at a 20% APR, and you suspect that a recession is coming. Minimum payments on large balances are normally about 2% of the balance, which would be $100. If you pay $100 per month, it will take 9 years to pay off your debt, and you’ll pay $5,840 in interest.

By paying more now, you’ll decrease the minimum payment you need to make later. That can be invaluable if you find yourself laid off and you need to reduce expenses. You’ll save on interest payments too, and you can use that money during a recession.

  • If you pay $200 per month, it will take you 33 months to pay off your debt, and you’ll pay $1,522 in interest.

  • If you pay $500 per month, it will take you 12 months to pay off your debt, and you’ll pay $515 in interest.

6. Make Careful, Strategic Investments

Stock prices often start declining before a recession hits, so knowing how to prepare for a recession involves understanding how to invest in a bear market. In short, continuing to invest during periods of volatility, and making sure that your portfolio is well diversified are the most important places to focus. Making contributions to your 401(k) via payroll deductions is an excellent way to dollar cost average into the market over time. 

7. Update Your Resume

Hopefully, you’ll be able to hang onto your job if a recession hits, but it’s best to be prepared in case you need to go job hunting. Check that your resume is up to date with your most recent work experience and accomplishments. Consider asking others their opinion of your resume, or using a resume review service to make sure you’re advertising what employers are looking for.

8. Look for Ways to Recession Proof Your Career

There’s no way to guarantee you’ll keep your job in a recession, but there are ways to make it more likely. What’s most important is providing as much value as possible. Focus on being a top performer, and look for opportunities to take on more responsibility at work. If you fill multiple roles at a company, that makes you more valuable, and your employer will want to keep you around.

Knowing how to prepare for a recession is also about how you view it. Even if it sounds cliche, a positive attitude can also help you hang on to your job. A study published in the Journal of Personality and Social Psychology found that agreeableness was the most important trait for job performance and career advancement.

Arm Yourself With Knowledge

If you work for a publicly traded company or you have access, take a look at your employer's financials and do some light research to see what's being said about the company’s financial position.

More than 100,000 people were laid off in tech in early 2023. Analysts were openly and loudly expecting these layoffs for months, but many were still surprised.

Pro Tip: Sometimes knowing how to prepare for a recession or a deeper economic collapse means getting ready for a layoff. See our article: How to Prepare for a Layoff: 22 Things to Do Right Now

9. Seek Help From a Financial Advisor

If you’re feeling worried or unsure about money, a financial advisor can evaluate your current situation and help you decide what to do next.

10. Trust Your Investments

Some people start panic-selling investments when a recession hits, but history has proven that to be the wrong strategy. Unless you absolutely need the money, plan to stay invested. Remember that any losses you incur are only on paper until you sell. If you hold on, your portfolio will likely bounce back when the market recovers.

The image below shows how the S&P 500 has recovered from previous downturns. As you can see, even a major downturn like the Global Financial Crisis in 2008 pales in comparison to the returns that followed.

S&P 500 over time

Recessions might seem scary, but they’re a normal part of the economic cycle. Most people live through multiple recessions during their lifetimes. The best way to approach a recession is to look at it as another financial challenge to plan for.

It all starts with a comprehensive budget, and you can prepare that with intuitive software like Monarch Money, which provides easier expense tracking and prioritization of debts.


Here are the most common questions people ask about how to prepare for a recession, with answers to each.

What happens to the average person in a recession?

The average person experiences more financial challenges and stress in a recession. These include a higher likelihood of job loss, since companies cut back during recessions. You’ll likely also experience more difficulty getting approved for loans, and losses in investment portfolios and retirement accounts.

Where is your money safest during a recession?

During a recession, your money is safest in bank accounts and treasury bonds. There’s hardly any risk of losing money with these investment vehicles. However, it’s important to stay invested with money earmarked for your long term goals. 

Individual securities are at greater risk than index funds or other ETFs. That’s because particularly in a recession, the risk of actual bankruptcy is higher for individual companies. Index mutual funds and ETFs can be a great low cost way to diversify your long term portfolio and decrease single-stock risk. 

How will a recession affect me?

There’s no one answer for how a recession will affect you. A recession could affect your job, your savings, your investments, and even your health. But recessions don’t affect everyone equally, and if you know how to prepare for a recession, you can minimize its impact on your life.

What should you not do in a recession?

Avoid taking significant financial risks during a recession. For example, a recession isn’t a good time to quit your job or take out a big loan. You also shouldn’t sell stocks just because they’ve dropped in value. Stock prices normally increase as the economy recovers.

Also, don't overspend, and save as much as you can.

And one last don't: Don't panic. Recessions are normal and people live through them, and even come out ahead. Keep calm and keep working and saving, and chances are excellent that you’ll preserve and improve your financial well being.

Lyle Daly Personal Finance Writer
Natalie Taylor, CFP®, BFA™ Head of Financial Advice at Monarch

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