How to Prepare for a Recession: 10 Steps to Recession-Proof Your Finances

Is a recession coming? There’s a lot of economic fear about recession in the news right now. The problem with the headlines is that they are meant to provoke fear, and that fear is meant to push people into hasty decisions that may or may not pan out with real benefits. We’re in the business of inspiring confidence and reminding you that you’re in control, no matter what’s happening around you. So, recession or not, you don’t have to participate in the “end times” mentality. Instead, we’d like to equip you with some practical steps on how to prepare for a recession, so that you can remain calm and confident.

It’s time to take a defensive posture. Prepare your mindset, your money, and your life for what’s to come. Here are 10 strategies to teach you how to prepare for a recession that will make you more resilient in any economy, and help to keep you from “participating” in the recession.

10 Strategies to Recession-Proof Your Finances

1. Build a Bigger Emergency Fund

Recessions tend to bring with them higher unemployment, fewer raises, and more business bankruptcies. If you have three months’ expenses saved up, aim for six months’ expenses. If you have a fluctuating income, own a business that depends on a healthy economy, or have low seniority in your job—an emergency fund of one year’s expenses is not too much.

There are several ways to go about saving more money. One of our personal favorite methods is using the Currence app to help you turn unconscious spending into unconscious savings. Currence has helped many people reach financial freedom. It’s designed in such a way that you’ll WANT to save more money, and it makes a great emergency fund.

2. Keep More Cash

Image: clear piggy bank full of money. How to prepare for a recession: keep a bigger portion of your portfolio in cash equivalencies.

If you have a significant portion of your portfolio or retirement accounts in stocks and bonds, it’s time to rethink and reallocate! In addition to your emergency fund, it’s a good time to get money out of the markets and into cash equivalencies and “safe money” harbors. Predictability is the name of the game in an uncertain economy. Create more certainty for yourself by taking “risk” out of the equation, at least for the short-term.

Not only will this protect you from a downturn, but it will give you cash to invest in assets that may be “on sale.” Cash creates opportunities.

Short-term solutions can include bank CDs, savings accounts, and treasury bills. (Short-term solutions are good if you are removing money from more unpredictable investments temporarily.) Ask your 401(k) or IRA administrator about fixed-rate investments, too.

Our favorite long-term solution for cash is high-cash value whole life insurance. If you are perhaps in your 80s or older, a single premium immediate annuity can be an excellent safe-money choice with a guaranteed interest rate. (Prosperity Thinkers can help you with whole life and immediate annuities. We do not recommend deferred annuities.)

3. Pay Off Consumer Debt

If you have high-interest debt or credit cards with expiring “introductory rates,” get them paid off. You don’t want to carry any debt with double-digit interest rates into a recession if you can help it. Think about how good it will feel to eliminate those monthly payments, which you can then allocate to your emergency or opportunity fund.

As far as the best way to pay off debt, consider two popular methods: the debt snowball or debt avalanche (also called a debt ladder). This YouTube video does an excellent job of explaining the differences and the pros and cons of each. One has a psychological advantage, and the other pays down debt more efficiently. It’s less important which choice you make, just choose what you think will be more motivating for you.

4. Lower Your Fixed Living Costs

Just over half of Americans live paycheck-to-paycheck. Don’t be one of them! This is not the best time to purchase new cars or a larger, more expensive home. (Of course, if you’ve got twins on the way or your old car just gave out… it could make perfect sense.) And definitely don’t refinance your 30-year mortgage into a 15-year loan with higher payments. Low payments are essential during this environment, don’t worry about your interest.

Not only should you be prepared to live on less if necessary, consider living on less voluntarily now and saving the difference.

  • Seek to lower your interest rate on any consumer debt you can’t pay off.
  • Eliminate memberships or subscription services you rarely use.
  • Downsize the clutter that’s filling your garage or storage unit. Sell items or donate them.
  • Read “How to Save $20 (or more!) Every Day” for additional saving tips!

5. Invest in Yourself

How can you make yourself more valuable to your employer, and/or make yourself more attractive to a new employer? If you want to stay in your current job and negotiate higher pay, Ramit Sethi’s “Ultimate Guide to Getting a Raise and Boosting Your Salary” has some worthwhile advice.

If there is a possibility you could be job hunting in the future, stay well-networked. Get to know people in your industry—especially those who may be ahead of you career-wise. Don’t wait until you are jobless to build your social capital. These days, who you know can be more important than your resume.

Now is also a good time to pursue additional training or certifications to expand your abilities and gain marketable skills. One resource we love is Udacity. They specialize in training people for in-demand tech fields. The training is online, affordable, and can be completed in months rather than years. Check out their nano-degrees here.

If you own a business, this is the time to build your client or customer list and up-level your marketing game.

6. Develop Additional Income Streams

This could be a side hustle or a new service or product in your business. Some ideas:

  • The gig economy and the apps that accompany it make it easier than ever to pick up extra work as an Uber driver, dog walker, or online freelancer.
  • More than 2 million people sell goods on Etsy.com, such as hand-crafted jewelry, art, clothing and vintage finds.
  • Retired professionals can often turn their expertise into a full or part-time consulting gig.
  • Experienced nannies and tutors are always in demand.
  • Home services from lawn care and gardening to housecleaning, painting, and organizing can be lucrative side gigs or viable businesses.
  • Buying a new home? If your old home could work as a cash-flow-positive rental, strongly consider keeping it as such.
  • This can be an excellent time to focus your investments and resources on cash flow rather than growth. See our 15 ideas for passive income.

One of the great things about the Currence app, as we mentioned earlier, is that it’s designed so that once you hit your savings target, you can use some of that to create additional passive income. While you’ll have to create those opportunities yourself, Currence gives you the tools to build up your capital. Once you’ve got that passive income coming in, you’ll be able to build your reservoir back up, rinse, and repeat!

7. Improve Your Credit Score

Credit standards tighten during recessions. And while, ideally, you’ll be downsizing any consumer credit, good credit will ensure you won’t pay more than necessary should you desire to finance a car, a home, or anything else. Good credit can also be useful if you have an extended emergency that requires more liquidity than your emergency fund.

And did you know that good credit can help you get a job? 29 percent of employers use credit checks in certain instances to screen applicants who will be handling money or need a security clearance.

8. Diversify Into Non-Correlated Assets

In our review of Dave Ramsey’s advice, we noted that a “diversified” portfolio of mutual funds alone will NOT protect you from the next market crash! To truly diversify, you want to invest in different asset classes—especially those that will not rise and fall with the stock market. This will help you prepare for a recession by weathering the various markets at play.

Some of our favorite non-correlated investments include:

Cash-flowing real estate. While commercial and vacation properties can be quite sensitive to economic fluctuations, there is never a shortage of apartments and rental homes for middle-class working people. Whether you own properties or invest in bridge loans, it’s smart to benefit from income-producing real estate. However, it’s wise to avoid flipping homes and other speculative short-term investments that could leave you holding the bag if the market goes south!

Oil and gas. Mineral rights lease contracts can provide excellent short-term income for investors. Oil and gas development partnerships are higher risk, providing greater upside potential (as well as downside) and significant, nearly-immediate tax benefits. Read “Is Oil and Gas Still a Good Investment?” to learn more about this asset class.

Life insurance cash value. Not technically an investment, cash value is the liquid portion of certain permanent life insurance policies. In a whole life policy, the cash value is guaranteed to grow each year. Mutual whole life companies have also paid dividends for well over 100 years—even throughout the Great Depression. Dividends help cash value grow faster. Prosperity Thinkers specializes in high-cash value whole life insurance and Kim Butler’s Live Your Life Insurance book is a classic!

9. Prepare Your Home for Emergencies

Are you ready for a power outage, natural disaster, or a scenario such as civil unrest or unexpected bank closure? Could you go a week without access to cash or groceries? When you learn how to prepare for a recession, you also want to learn how to prepare for an emergency. Here are a few tips to consider:

  • Have the basics readily available: extra food, potable water, batteries, an alternate heat or power source.
  • Always have some cash around. Yes—we mean the green stuff! Just keep it somewhere safe, and make sure that if something happens to you, someone you trust knows where to find it.
  • Keep a gas can, jumper cables, blankets, and emergency meals in the trunk of your car just in case you can’t return home when you expect. Even if you have emergency roadside assistance, keep in mind that when disasters strike such as a storm or flood, normal wait times can turn into many hours or even days.
  • Start a garden—or tend the one you have. A garden is not only a wonderful way to practice self-sufficiency—it’s a great way to eat more fruits and vegetables, too!

10. Develop a Recession-Proof Mindset

Develop a bullet-proof mindset.

When you prepare for a recession, it’s important to prepare your mindset as well as your money for a potential recession. Thriving begins with your thoughts.

Practice gratitude—not just for the “good things,” but for everything. Mindfulness, meditation, and prayer have been proven to lower stress and keep people healthier, in addition to many other benefits. Get some fresh air while you’re at it for that compounding effect.

Develop mental toughness or “grit.” Here are some suggestions from James Clear on how to develop grit and build a more resilient mindset.

Unplug from the “daily disaster news” of mainstream media outlets. (It helps a LOT if you have your money positioned where you don’t need to be glued to the drama of the stock market!)

Focus on positive news. Nurture relationships. Learn from mentors.

Finally, be mindful of how your thoughts shape your experience. Just because there is a recession doesn’t mean you have to choose to participate in it! You have more power than you know to create a prosperous life, regardless of what the reporters and pundits say.

Your personal economy is not dependent upon interest rates, the stock market, which political party is in office, or other outside forces. Although those factors have an influence, you can ultimately choose to thrive in any economy—if you believe you can. Keep a positive focus, look for opportunities, and prepare to prosper—even during next recession.

Finally… Don’t Wait to Prepare for Recession

Is a recession coming? We can’t say for sure. Yet, regardless of what it happens, you’ll have more peace of mind and you’ll be steps ahead in reaching virtually any goal if you work to recession-proof your money now. Plus, many of these tips on how to prepare for a recession can help you live more abundantly no matter the economy. It doesn’t hurt to practice good habits now.

Can we help you prepare your portfolio for a recession? We specialize in cash value whole life insurance. We can also invite you into Currence so you can start building your emergency fund. Contact Prosperity Thinkers today to learn more. We use advanced analytics tools such as the whole life calculator to help you get the most out of your insurance policy. 

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