7 Ways to Recession-Proof Your Life

There are several everyday habits that anyone can adopt to shield themselves from the impact of a recession, or even avoid feeling its effects altogether. As the recession takes hold, these strategies can help you navigate it without facing major financial setbacks.

Key Points to Remember:

People can cultivate habits that provide protection even before an economic downturn or recession hits. When it comes to income, it’s crucial to have an emergency fund, maintain good credit, have multiple income streams, and live within your means.

For investments, it's important to focus on the long-term, diversify your portfolio, and be realistic about the level of risk you're willing to take.

Build an Emergency Fund

If you keep a significant amount of cash in a high-interest, FDIC-insured account, your money will hold its value during market volatility and be highly liquid, giving you quick access if you lose your job or face a salary reduction. Having your own savings means you're less reliant on borrowing to cover unexpected expenses or job loss, especially when credit is harder to come by during a recession. When that happens, use your emergency fund for necessary expenses, but be mindful of reducing discretionary spending to preserve and replenish the fund as quickly as possible.

Live Within Your Means

By consistently living within your means during prosperous times, you're less likely to fall into debt when costs like gas or groceries rise. You'll also be better prepared to adjust your budget in other areas to make up for any increases. Debt can quickly snowball if you're unable to pay it off—consider how much higher your expenses could get if you're paying 29.99% APR on your gas charges by putting them on a credit card.

To take this strategy further, if you and your spouse both earn income, consider living on just one salary. This approach can help you save a substantial amount of money during better times—imagine how much faster you could pay off your mortgage or how much earlier you could retire with an additional $40,000 in savings each year.

During tough times, if one spouse loses their job, you’ll be fine because you've already adapted to living on a single income. While contributions to savings may pause temporarily, your regular frugal habits can carry on as usual.

Note: Interest on credit cards is only charged if you don’t pay off the full balance each month. If you only make the minimum payment, your credit card debt will continue to accumulate.

Create Additional Income Streams

Even if you have a solid full-time job, having an extra source of income on the side can be beneficial—whether it’s consulting or selling items on platforms like eBay. Multiple income sources provide more security. Just as diversifying your investments is crucial, diversifying your income is equally important.

If a recession hits and you lose one income stream, you’ll still have another to rely on. While you may not earn as much as before, every little bit helps. In fact, by the time the economy recovers, you may find your side business has grown.

Focus on Long-Term Investing

So the market drops 15%—what’s the big deal? If you don’t sell, you won’t lock in any losses. The market goes through cycles, and over time, you’ll have plenty of opportunities to sell at a higher price. In fact, buying when the market is down can pay off in the future.

However, as retirement approaches, ensure that part of your portfolio is in liquid, low-risk investments to allow you to retire on time, while giving the stock portion a chance to recover. You don’t need to have all of your retirement savings ready to access right away—just a portion of it. Even if the market is down when you’re 66, it could be back up by the time you're 70.

Understand Your Risk Tolerance

While investment experts offer guidelines based on age for asset allocation, if you find yourself unable to sleep because your investments are down 15% and the year isn’t even over, it may be time to reassess your risk tolerance. Investments should bring you peace of mind, not anxiety.

That said, don’t sell anything during a market downturn, or you’ll cement those paper losses. When the market recovers, consider shifting some of your stocks into bonds or swapping riskier small-cap stocks for more stable blue-chip stocks.

If you have extra cash and want to adjust your allocation during a dip, consider investing in undervalued stocks with long-term potential. Buy low now, so you can sell high later or hold them for future gains.

Just be careful not to overestimate your risk tolerance, as this could lead to poor decisions. Even if conventional advice suggests an 80% stock, 20% bond split for your age, you’ll miss out on the long-term returns if you sell when the market is down. These guidelines are designed for those who can ride out the ups and downs of the market.

Diversify Your Investments

By spreading your money across different assets, you reduce the impact of market dips, making it easier to stay calm during downturns. If you own a home and have a savings account, you’re already on the right track: you’ve got exposure to both real estate and cash.

Specifically, aim to create a portfolio with assets that aren’t closely linked, so that when one performs well, the other may not—and vice versa (for example, stocks and bonds). This also means considering investments in sectors or businesses unrelated to your primary job or income source.

Keep Your Credit Score High

During times when credit is harder to obtain, those with strong credit scores are more likely to get approved for things like mortgages, credit cards, or loans. To maintain a high credit score, make sure to pay bills on time, keep your oldest credit cards open, and maintain a low debt-to-credit ratio.

A credit score between 740 and 850 is considered excellent. Aim to stay within this range.

In tough times, it’s important to communicate with creditors to keep your accounts in good standing. Lenders and businesses often prefer to work with you to maintain the relationship rather than write off your account as bad debt.

What Is a Recession?

A recession refers to a substantial drop in overall economic activity. Traditionally, it's been defined as two consecutive quarters of negative growth in gross domestic product (GDP), along with other indicators like rising unemployment. However, the National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity lasting several months, typically seen in measures such as real GDP, real income, employment, industrial production, and wholesale and retail sales.

How Can I Prepare Financially for a Recession?

There are several everyday habits you can adopt to safeguard yourself from the impact of a potential economic downturn. Building an emergency fund, maintaining good credit, having multiple income streams, and living within your means are essential strategies that can help you weather financial challenges during tough economic times.

How Can I Make My Investment Portfolio More Resilient to a Recession?

To make your investment portfolio more recession-proof, it's important to take a long-term view of your financial goals, diversify your investments, and assess your risk tolerance realistically.

The key to navigating a recession is preparing for the worst-case scenario. Start by building your emergency fund, paying off high-interest debt, and living within your means. Diversify your investments, focus on long-term growth, be realistic about your risk tolerance, and monitor your credit score. When a recession strikes, it's also wise to consider taking on a side job to maintain your income.