Written by Zandile Chiwanza
Wednesday, March 15th, 2023
You may be hearing a lot of talk about recessions lately — perhaps you believe we're already in the midst of one. While no one can definitively say if or when a recession will happen, doing what you can to prepare for a potential downturn is a smart idea.
A recession, which is defined as a pronounced period of decline in economic activity, can certainly take a toll on your finances. However, there are steps you can take to help insulate yourself against these negative consequences.
Here's what some financial experts and influencers who have gone through a recession before have to say.
Prioritize paying off high-interest debt
A humbling experience with payday loans was a rude awakening that Nathalie Douglas, aka forevermrsbudget, never wants to repeat.
"I had to seek help from a family member, which was difficult to do as a grown adult," Douglas says. "Explaining why I needed the help was a humbling experience."
One of the best ways to prepare for a recession is to pay down high-interest debt, such as credit card balances. Credit card interest rates tend to be higher than other forms of debt such as lines of credit or mortgages. The more of your credit card balance you are able to pay off, the lower amount of interest you will pay.
"When times are tough, and money is tight, it's best to free up as much cash flow as possible," Douglas says.
Build or repair your financial foundation
During the "Great Recession" of 2007 to 2009, Caron Matthew, money coach and founder of PocketBrook Inc., drained all of her savings, including her emergency fund, to close on a home purchase.
"This left me anxious, exposed, and vulnerable to unexpected expenses," Matthew says.
When she bought a new build, she thought she'd avoided all the unexpected costs that come with fixing up an old home. She learned the hard way that new builds also come with their own set of expenses and doesn't want to make the same mistake twice.
Next time, Matthew says, she won't make major purchases that put her financial security at risk. "We worked hard to restore our emergency fund and there's no touching it unless it's a true emergency."
Depending on where you're at in your financial journey, her suggestion is to go back to personal finance basics: track your income and expenses, make a budget, and build an emergency fund that can cover your costs for a few months in case of job loss or reduced income.
You may also want to review your insurance coverage to make sure you have enough protection but are not overpaying for coverage you don't need.
Tune out the noise
Recession anxiety is real. Try to keep a level head and look at the evidence to see if your fears are justified.
"A recession can have us thinking we'll have to file for bankruptcy or end up homeless if we lose our jobs," Matthew says. "And this simply isn't true for most people."
Take a step back and think about how it will impact you in five, 10, or even 20 years. You may just be looking at a short-term setback.
It's good to stay informed about the economy, but sometimes the news can be overwhelming. You don't have to completely tune it out, but you can control how much you consume by turning off those breaking news alerts and checking in with a trusted news source once or twice a week instead of multiple times a day. And, it's okay to protect your mental health and avoid discussions about a possible recession with others, if it's affecting your well-being.
Find healthy ways to cope with stress
Rest. Exercise. Consider taking free courses to enhance your skills.
Erika Wasserman, a financial therapist, says it's normal to feel stressed about a recession's impact on your future, but try to focus on the present moment and use the words "right now."
"Recessions do eventually end," says Wasserman. If you're feeling overwhelmed, take some time for self-care. Try some breathing exercises and grounding techniques, and be gentle with yourself.
Remember that a recession is beyond your control, but you can control how you prepare, react, and your attitude.