5 Ways To Recession-Proof Your Finances

You know, sitting down and looking at your finances is never a bad idea. Making sure you have a solid plan in place, that you're not overspending, and that you're on track with your savings and investments are great little wellness checks that can keep you on course. And while those things are easy to do when things are going well and checking your portfolio is just all right, all right, all right. It's also important to have a plan when things might not be going so well or even a little more unpredictable. And guess what? Lately, Americans have not been strangers to that unpredictability. Boy, oh, boy. In fact, there have been rumblings that we may be facing a recession within the next year. While no one wants to go through a recession, it does serve as a reminder to take a step back and make sure your financial house is in order. As we always say, you want your financial plan to be successful before, during and after times of volatility or uncertainty. We'll dive into some of those concrete strategies you can use to protect yourself later in this video. But before we do that, let's make sure we're all on the same page about what exactly a recession is. The definition of a recession is two consecutive quarters of negative real GDP growth. And in this context, real just means adjusted for inflation. The Atlanta Fed releases regular projections of quarterly GDP growth. And at the time of this recording, they're projecting negative real GDP growth for the first quarter of 2025 at around negative 2.2%. If this trend continues and we do see negative real GDP growth for the second quarter of 2025, we will have entered that recession. Now, it's important to give context and clarify some things before we get into some of those more actionable takeaways. The first is that a recession does not necessarily mean the market crashed or even that we're in a full bear market. Just to give some examples, if we look at First Trust's history of U.S. bear and bull markets, we see that since 1942, the U.S. has experienced 13 recessions. Of those, five occurred entirely outside of bear markets, while seven spanned periods that included both bear and bull markets. So it's entirely possible that your investment portfolio can continue to grow even if we are technically in a recession, just with a side of volatility. That being said, you may still feel the effects of a recession in other areas of your life. Recessions are typically characterized by stagnant job markets, reduced spending and slowed business growth. With a solid understanding of what a recession is and its potential implications, let's explore five key strategies you can implement to protect your finances during economic uncertainty. These practical steps will help soften the blow and potentially provide financial stability, even if you're negatively impacted by the surrounding economic conditions. The first is perhaps the most straightforward, and it's just to look at what we call your two levers. These are your income and expenses. Regarding income, you'd want to pull up on this lever to make more money. It's a lot easier said than done, but diversifying your income sources through things like side hustles or even freelancing in uncertain times can be a valuable way of making sure that you aren't at the whim of external factors like company performance or even a round of layoffs. Then for spending, you'll want to pull this lever down. Consider reviewing reoccurring subscriptions, negotiating better rates for things like insurance or finding creative ways to reduce daily expenses without sacrificing your quality of life. The goal isn't to eliminate all discretionary spending, but to identify areas where you can make meaningful reductions that align with your financial priorities during uncertain economic times. This scary black bar is what you spend on things that no one ever, ever needs, like multiple magic sets. The most tangible effect of reducing your expenses is that it can help reduce your spending footprint, which can help mitigate the strain you may feel from that uncertain job market and general volatility. This reduced spending can also create a more substantial financial buffer without necessarily needing to earn more. This strategy is particularly powerful because it has a dual benefit. It increases your monthly savings potential while simultaneously making your existing emergency fund last that much longer. For instance, if you can trim your monthly expenses by 25 percent, I know that's hard, but you could do it. Your six month emergency fund effectively becomes a seven and a half month fund. If you cut your expenses in half, your six month emergency fund could last an entire year. And this brings us to our second point. Ramping up those emergency reserves when it comes to your emergency fund. This is your first line of defense against external factors outside of your control, and it keeps you from making those desperate decisions. It's what keeps you from living paycheck to paycheck. And if you're someone who experiences a job loss or reduced income as a result of a recession, it's what bridges the gap between losing one job and finding another. We generally suggest three to six months of expenses in cash, not access to cash, but cash, ideally in something like a high yield savings account so that the cash is there when you need it. If you're someone in a high demand field that can replace your income rather quickly with another position or you have a spouse with a similar income, three months may be enough to tide you over. If you're in a more specialized field or you're the sole earner of your household, you may want to come closer to six months. And if you're a business owner, someone with a more volatile income, or you're even retired, you may want to consider going beyond six or even 12 months of expenses. An emergency fund is especially important during a recession when job security might be less certain and finding new employment could take longer than usual. These dollars act not only as a financial buffer, but also as a buffer from your emotions. They can help you keep a level head, even amongst the chaos. Another key strategy and a way to keep a level head is to stress test your financial plan. This involves careful reviewing your existing financial strategy to identify potential weaknesses and ensure it can withstand economic pressures. It sounds so simple to have a plan for your money and know what your money is doing. Yet it's where many Americans struggle. In fact, according to a recent Empower survey, only about half of all Americans have a clear plan to meet their financial goals. If you haven't created a financial plan yet, now is the perfect time to develop one. Just having a plan can provide confidence and clarity in these uncertain times. But let's explore how to actually conduct this stress test. When you sit down to evaluate your financial preparedness, you'll want to start by taking an honest look at your current situation. And potential vulnerabilities. A good stress test involves examining both your immediate financial position and your long-term financial strategy to identify any weak spots that could become problematic during economic turbulence. That's going to be where trouble hits you. Begin by assessing whether your current industry or job position might be vulnerable during this economic downturn. And please be honest with yourself. This evaluation is particularly crucial during recessionary periods when certain sectors may face more significant challenges than others. Next, verify that you have established an adequate emergency fund to cushion against these potential unexpected financial shocks. And don't sleep on putting in the work reviewing your current spending habits. It might even involve that dreaded word of a budget to ensure that they align with your financial goals and current economic reality. Beyond these immediate concerns, developing concrete action plans for addressing any identified weakness in your financial foundation is essential and creates tremendous peace of mind. This includes setting specific targets for building your emergency reserves and implementing realistic budgeting strategies. Finally, evaluate your savings and investment rates to ensure you're maintaining appropriate progress towards your long-term financial objectives while being mindful not to let your short-term market conditions derail your established investment strategy. While knowing this number is important for general financial planning during a recession, it's crucial to resist the urge to obsessively monitor or adjust your investments based upon daily market fluctuations and movements. In fact, one of the most important pieces of advice we can give during economic crazy uncertain times is ease up on the habit of looking at your investments and the daily ups and downs. If you must, remember that when in doubt or when you're feeling market anxiety, zoom out to see how well you've done over the long-term versus this specific moment in time. While economic downturns often trigger fear-based selling, historical data shows this reaction can be devastating to your portfolio's growth. Market timing, like trying to exit before things get worse, and then quickly re-entering before things bounce back is a risky strategy that often backfires. In fact, data shows that the median one-year return following significant market selloffs exceeds 30%, meaning those who panic and sell their investments might miss out on substantial V-shaped recoveries. Furthermore, maintaining your investment strategy becomes even more critical when you consider that recessions and market performance don't always move in lockstep. A technical recession doesn't necessarily equate to poor market returns. By staying committed to your long-term investment plan and continuing to invest regularly, I like to call this ABB, always be buying, baby. You position yourself to potentially benefit from market recoveries and avoid the costly mistake of making emotional decisions during periods of economic uncertainty. Last, don't panic. For many, this may be your first time dealing with a recession and wild market swings. I really want you to internalize and absorb how you're feeling right now so you will be better prepared on how to deal with future market swings personally. This is what we call know thyself. This is a foundational component to any sensible long-term financial plan. You can't let your emotions, especially emotions in response to what we hope is just a season influence your decision-making regarding your finances. As we saw with the first trust data, recessions are a normal part of the economic cycle with one occurring roughly every six years. However, during these periods, many people let their emotions drive their financial decisions, often leading to massive costly mistakes. Instead of letting fear guide your choices, it's essential to approach this situation with a calm and thoughtful mindset. This balanced perspective will help you make rational decisions that align with your long-term financial goals rather than reacting to short-term market fluctuations or economic uncertainty. As I shared earlier, a good plan will be good before the poop hits the fan during the ensuing chaos. And even after things settle down, do this right. And you may even come out on the other side, stronger and wealthier. I'm your host, Brian Preston, Money Guy, out.