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.
