Managing your personal finances during a recession can be stressful. Oftentimes, recessions involve job loss, income reductions and decreases in the values of various investments. Losing income and feeling like your wealth is declining isn’t exactly comforting, but by planning and preparing before a recession hits and by implementing some key strategies during a recession, it can be possible to weather the storm well and come out on the other side in an even better position long-term.
Before we get into some key personal finance strategies during a recession, let’s first talk about the period of time before an actual recession. Truly, the most important thing(s) you can do to weather a recession come well before the recession hits. To keep this simple, keeping your big ticket expenses in check from a long-term perspective will improve your personal financial situation for any time period, but can be especially helpful during a recession.
By big ticket expenses, this typically refers to housing expenses and auto expenses. If you’ve taken on a mortgage that is taking up a significant chunk of your monthly income when times are good, this mortgage is going to be brutal during a recession. Likewise, if having an expensive new car that’s costing you $500 per month before you even get to insurance, maintenance and fuel, you might be setting yourself up for significant stress during a recession. Keeping the big ticket items in check will increase your disposable income during good times and increase your flexibility during harder times.
Now regardless of how well you did on the big ticket items, if you find yourself in a recession, the following strategies can be useful. It’s just that you’ll have even more flexibility if you have your larger expenses in check. With that said, let’s move on to the 10 key personal finance strategies during a recession.
1. Cut your recurring expenses
Let’s start with some expense management. In today’s world of ubiquitous subscriptions, products and services that hit your credit card every month, it’s imperative that you give these services a hard look during a recession. Everything from your gym to your streaming services to your food deliveries to various online services, it’s never a better time than during a recession to cut out some regularly billed items.
Every time I do this process, I end up shedding about $100 in monthly costs for things that I’m either not using or only marginally using. Managing your cash flow is huge during a recession, so start with the things that hurt your cash flow not just once, but every month!
2. Protect your job & income at all costs
Your first goal (maybe this one should have been listed first?) in a recession is to protect your job or your income. Obviously, this is out of your hands to some degree and depends widely on your situation. But the point still stands. Whatever you can do to protect your income and your job is easily the most important factor in weathering the recession.
Turning off your income spicket changes everything in personal finance. If you can’t fund your expenses and your investments, you have to turn to emergency funds or debt in order to pay your bills. This means you’re digging a hole that you have to get out of when your income returns, and therefore, sets your personal finance process back a few months or even years. By maintaining your income, you can push through the recession, prevent digging a hole that you have to climb out of and potentially even continue making progress financially despite tough circumstances.
3. If you lose your job, find ways to generate money & don’t lose days to zero productivity
If you do in fact lose your income, it’s important to find ways to make money. Keeping the steady stream of incoming cash flow is everything during a recession, and if it means getting creative, you have to do it. Nowadays, it’s common to drive for Uber, work for Instacart and shop & delivery groceries for individuals or other gig-like jobs. But you can consider the more traditional approaches as well such as pizza delivery, handyman work, etc.
The most important element here is to not lose days to laziness, despair or just general non-productivity. Staying motivated to keep the ball moving forward is key. Spend time each day generating cash, and spend time each day working towards new full-time employment. If at the end of each day, you can say honestly that you made progress in each of these areas, then you’re making quality use of your time.
4. Figure out the budget & stick to it
Budgeting is hard for many people. I find that it’s really based on personality. If you like details and organization, it’s likely that you’re pretty good at budgeting. If you aren’t good with details and organization, then budgets probably make your skin crawl. Well, during this time, it’s important to set aside your natural inclinations and budget no matter what. What you decide to budget and how isn’t important, but the key is to minimize the long-term damage to your finances. Can you cut expenses so that you’re only minimally drawing down your emergency funds? Can you manage to stick to a budget so that you’re adding zero debt to your situation? These are the keys.
If a recession hits and your job is stable, you still should consider mapping out a budget during this time of uncertainty. If it’s possible to pool up some extra cash during this time, it can pay dividends should things change and job loss occur. Or, if things go back to normal and you end up with a pile of cash at the end of the recession, well, that’s hardly a bad thing.
5. Get your entire family on board
Ensuring you’re on the same page with your spouse and entire family can make a huge difference in how successfully you navigate the financial challenges of a recession. Obviously this starts with a spouse. If you and your spouse aren’t on the same page about budgeting and managing expenses and cash flow, the chances of managing your money well during this time is really low.
But it’s also a great time to involve the whole family including age-appropriate children. I find that families that discuss hardships and challenges together can often bond and rally around each other to work hard at meeting the challenge. If kids are brought into the discussion and are shown the why behind certain decisions like no more eating out at restaurants until someone is re-employed, they are often amazing at being a part of the solution.
Work together as a family and you’ll not only achieve your goals easier, but you might come out the other side a closer and stronger family unit.
6. Find free activities & entertainment
A recession is a great time to expand your entertainment options. For most of us, there are way more free activities nearby than we typically take advantage of. Everything from public parks to outdoor bike rides and runs are great ways to pass the time without spending your hard-earned money. What are other good suggestions? Neighborhood outdoor movies and picnics, fishing, walking and biking nearby trails, hiking if you have hiking trails nearby, swimming in a pool or nearby springs and lakes, going on walks, rollerblading, packing up a lunch and driving somewhere new to eat it (to replace typical restaurant outings) and working on outdoor projects such as building a garden or a tree house.
7. If you’ve done what you needed to do previously, don’t overreact
If you’ve managed your finances well for years, then there’s a good chance that you’re prepared for a recession, even a recession that involves you losing your job. If you prepared well, you likely have no consumer debt and a health emergency fund. If that’s the case, then you don’t have to be overly anxious. You’ve prepared well, and don’t need to add unnecessary anxiety to an already challenging situation.
For those financially prepared, usually the combination of modest lifestyle adjustments, the use of an emergency fund where needed and aggressive action to rejoin the work force or find other ways to generate income leads to results that are not financially devastating and in many cases are nothing but a minor speed bump over the long-term.
Recessions can be stressful, so if you’ve done well getting to this moment, don’t make the situation harder than it has to be. Recessions, though frustrating, are relatively normal things that will happen once a decade or so. Know that you planned for this and will get through it.
8. If income is protected, do what you can to invest heavily
If you’re fortunate in that you know with high confidence that your job is secure or your income protected, you can use this recession as an opportunity to aggressively invest at lower prices. Typically a recession comes with a major market correction or even a stock market crash. While the tendency is to hold on to cash (for good reason), being slightly more aggressive during this time could pay dividends over many years as the shares and positions you purchased at lower prices during the recession go back up to much higher valuations over time.
While investing new cash into positions is the obvious route here, there are other ways you can take advantage of this situation as well. You might increase your savings into 529 accounts. If you’ve been paying extra money toward your mortgage, consider pausing that and putting that money into the stock market instead to take advantage of low stock prices. If you have systematic allocations on investment accounts such as “conservative” or “moderate,” consider shifting those toward “aggressive” allocations at this time which will likely shift more of your money away from bonds and into equities (again to take advantage of lower equities prices). If you’re in especially good shape and have been waiting to make a large purchase such as a vacation home or maybe a new piece of real estate, this could be a great time to pull the trigger on that move.
9. Don’t lock in losses
The worst thing you can do during a recession is liquidate your investments that have just taken a 30% hit due to the recession. A main reason why you have an emergency fund is to ensure you have cash to use when needed and not have to liquidate investment positions because you need the cash.
If you liquidate investments, you’re essentially locking in those losses and making them permanent. This speaks to a broader financial strategy where you should be planning ahead of time and know that you won’t have to touch investments even under fairly dire circumstances. This is why many suggest boosting an emergency fund before beefing up your investment allocations.
10. Consider how well you were prepared, and start thinking about how you’d prepare differently for the next recession
Once you’ve stabilized your financial situation, perhaps the best thing you can do is learn from the experience so that you’re better prepared for the next time a recession or challenging financial situation arises. Much of personal finance and financial planning is managing risk, so take a big risk assessment of your lives. Do you have enough of an emergency fund to where if you lose your job, you’re not only ok but won’t need to liquidate any investments? Are your major housing and auto expenses in check to where if your income were disrupted, it wouldn’t break you?
What is your investing strategy during the good times and the bad times? Taking emotion out of the investing process can be huge, so map out your moves ahead of time and make the decision process in the moment a very simple thing.