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How to recession-proof your finances

With economic turmoil looming, everyone wants a way to keep their funds safe. But is that really possible?
Credit: Annelisa Leinbach, AlenKadr / Adobe Stock
Key Takeaways
  • Two-thirds of economists said they expect a recession in 2023, according to a recent survey.
  • Although macroeconomic conditions are outside of your control, preparing your finances for a recession is something everyone can work toward.
  • From cutting spending to investing in relatively safe assets, here are some steps you can take to weather the next economic storm.
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In the wake of the COVID-19 pandemic, the stock market and economy seemed to continue stronger than ever for a while. Then, inflation started to soar. What goes up must come down, and now we’re being hit by a double-whammy of post-pandemic economic problems and new geopolitical issues, like the energy crisis.

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If you’re worried about a recession coming soon, you’re not alone. 74% of U.S. consumers are thinking the same thing, and experts echo their concerns. More than two-thirds of economists expect a recession to hit the country in 2023, with some believing it may come earlier. 

“We are in or currently heading into a recession,” says Howard Dvorkin, a certified public accountant, financial author, and chairman of “When the government cut back domestic oil production, it raised gas prices the next day.” 

Tough times may be coming, and there’s little we can do about the wider macroeconomic conditions the world may face over the coming months and years. However, we can take action to protect our own finances.

What to expect from a recession

For many, a recession means “financial crisis” or a general feeling of panic rather than a precise set of conditions. But among experts, a recession has a precise definition. According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Although disputed by some, this definition is still widely used, and it’s our first clue to understanding how we should treat our finances during this challenging period. When a recession hits, we can expect four broad impacts:

  1. Lower economic growth
  2. Unemployment
  3. Lower wages
  4. Falls in asset prices

The first one is in the very definition of a recession, and may result in companies going bust or struggling to scrape by. As a result, rising unemployment is a natural consequence as jobs disappear. A lower supply of jobs and a higher labor supply (due to unemployment) results in lower wages. And since average consumers have reduced spending power (due to lower wages) and businesses suffer from poor growth, most asset prices fall, including company stocks and properties.

This is a simplification, and every recession is a little different, but we should expect something roughly along these lines. So, now that we’ve established what you need to prepare for, what can you do to protect yourself?

Limit unnecessary spending

You might not be able to control your wages, whether your employer goes bust, or if you become unemployed, but you can control your own spending — and often more than you realize.

The first step to cutting down is tracking what you’re actually spending your money on and identifying places you can cut down.

“There’s always 15% of the budget that can be cut,” Dvorkin says. He advises that limiting big-ticket expenses will have the greatest impact, but recommends starting small, such as by reducing spending on things like going out for lunch or coffee.

Another place to examine is subscriptions. Between streaming, news, and deliveries, it can be surprising how much multiple $5- to 15-per-month commitments add up, as Million Stories media discussed in a recent TikTok.

Then, use your findings to make a budget. Personal finance expert Erin Lowry recommends something called a “bare essentials” budget, which involves stripping away all non-essentials to help you figure out how much you really need to get by each month. You can then refine it to be less strict later on.

If all of this sounds too time-consuming or difficult to figure out, there are plenty of apps that can help. Some sync automatically to your bank account to help you track spending, while others record whether you’re sticking to your budget or even automate your savings.

Build an emergency fund

As you start spending less, you can use what you save to build yourself a safety net.

“Cash is king,” Dvorkin says. “People need liquid funds for emergencies. Try to save three months of living expenses up front to start, ideally six months, but this is difficult for most people.” 

Some experts recommend saving more if your income is volatile, such as if you’re self-employed. You may find that the number you would need to save to cover living expenses for multiple months is so high that it’s demotivating, so it may help start with a lower target. Even $1,000 is better than $0.

Once you build your emergency fund, you‘ll have a pot of money to draw on when needed. For instance, you could use your emergency fund to pay for living expenses if you lose your job, unpredictable medical expenses, or a replacement boiler if yours breaks down.

Since asset prices tend to be volatile during a recession, it’s best to put the money into a liquid savings account. Investments and assets like property aren’t true emergency funds.

Approach investments carefully

If you have a healthy emergency fund to back you up in case times get tough, you’re at a point where you can think about investing (if you want to). However,  if you would prefer not to take risks with your money or you’re planning on spending money on a big purchase in five years or less (e.g., a new house or car), it may be best to stay away from this. 

Investments fluctuate in value at the best of times, and since asset prices usually fall during a recession and many companies go bust, it’s an especially risky time to invest. It’s not for the faint of heart. If you do want to invest, it’s best to speak to a financial adviser first, who may advise you on how to make diversified investments into accounts like a 401(k) or IRA.

Also, many people opt for lower-risk investments, such as government bonds. They might not have the most impressive returns, but they’re also historically less likely to crash and burn.

In the past, gold has earned something of a reputation as a “safe haven” asset since its price tends to rise when others fall. However, there’s no guarantee this pattern will continue in the future.

Overall, the best way to “recession-proof” your finances is by sticking to what’s in your control: cutting down your spending, preparing for the worst, and making sure you have plenty of liquid cash to cover you during emergencies.


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