How to recession-proof your finances

The talk of recession has been making the rounds on Wall Street and now on Main Street. Whispers of recession have become shouts that are hard to ignore.

We see housing sales slowing down and supply-chain interruptions while also witnessing job growth and stock market rallies —a ll of which begs the question, “Are we in a recession?”

It’s complicated. Though there are some generally established indicators that can signal an economic downturn, it seems like this one has been a little difficult to call because of mixed signals in the American economy.

However, we’ll do our best here to explain what a recession is and how you can protect your finances if the effects of an economic downturn visit your home.

What is a recession?

Simply put, a recession is when there’s a general decrease in economic activity. But how much of a decrease indicates a recession? A generally accepted indicator of a recession is when there are two or more consecutive quarters of a negative growth rate of gross domestic product (GDP), or the total value of what a nation produces.

The U.S. recently experienced two executive quarters of negative growth, but analysts are hesitant to call it a recession.

Even the White House has decided to avoid the “R” word because a recession also considers other factors like the labor market, consumer and business spending, industrial production, and incomes.

Many industry analysts and major news outlets are currently citing red flags of an impending recession, but government officials haven’t yet joined them.

The White House explains that The National Bureau of Economic Research (NBER) Business Cycle Dating defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

They monitor variables, including “real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production.”

How long does a recession last?

The good news is that recessions come and go, and the cyclical nature of economies is that they experience ups and downs. To even call it a recession, the NBER depends on government data, which typically lags.

According to the White House, this means that we usually won’t know about a recession until it’s over. When a recession does come, it can last about ten months on average (opens in new tab).

7 Ways to recession-proof your finances

Live below your means

One of the best ways to recession-proof your finances is to spend less than what you earn. Ideally, you’ll use the difference to either pay off debt, save or invest.

Some people make this work by decreasing their expenses, increasing their income or saving one spouse’s income while using the other income to pay bills. 

Cut your expenses

When cutting down expenses, you might need to negotiate rates for your monthly bills, eliminate unused subscriptions, or consciously spend less on discretionary categories like travel, entertainment, etc.

You might have to downsize to a one-car household or cut back on some activities and hobbies to save money. Other ways to decrease your expenses could include:

• House-hacking (sharing housing expenses)
• Cut the cord on your cable services
• Move to a lower cost-of-living area
• Downsize your home

Increase your income

Another way to live below your means is to increase your income. There are plenty of ways to approach this. You could:

• Ask for a raise at your current job
• Move to a higher-paying job or career
• Add a side hustle
• Sell things around the house for extra money
• Adjust your income tax withholding on your paycheck. (You’ll get a small refund, however)
• Buy income-generating assets

Pad your emergency fund

If you are uncertain about your income or expenses, a good offensive move is to add to your savings. Having extra funds on hand can be a tremendous advantage if your income drops or expenses increase.

This can prevent you from depending on debt to make up shortfalls in your budget.

Pay off debt

If you consistently pay compounding interest on your debt obligations, you’ll quickly find it difficult to get ahead financially. To decrease the interest you pay, aim to accelerate your debt repayment. 

Investing in appreciating assets

This might be a little hard to do if you are focused on survival, but if you’ve room in your budget, investing just a tiny portion of your income can mean great rewards down the line.

If you work at a company with a 401(k) match from your employer, you can start your investing journey sooner than later, and get a little help to boot.

A recession often happens in tandem with a downturn in the stock market or even the real estate market. If you can pick up these assets “on sale,” so to speak, you’ll give yourself plenty of room to reap the benefits as the economy recovers.

Take advantage of freebies and money due to you

Another option is to look for discounts and freebies, including shopping during sales, collecting credit card rewards or getting free things on your birthday.

With all the gas rebates and state stimulus payments announced this year, look at your state’s government sites to see if you qualify for these payments.

You can also check out your state’s unclaimed funds website, which only requires a name to search for unclaimed properties.

Protect your finances

Although the threat of an economic recession may seem scary and unsettling, just know that there are ways you can still maintain control. Take inventory of your finances, gather facts and focus on protecting your savings.