Editor’s note: Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.
Thirteen recessions, or economic downturns, have occurred in the U.S. between 1945 and 2020. That’s according to the National Bureau of Economic Research (NBER), the private, nonpartisan organization that tracks U.S. economic cycles and officially declares recessions. Based on this history, you’ll experience multiple recessions in your lifetime. Fortunately, you can proactively prepare for their eventuality.
What is a recession?
In the simplest terms, Merriam-Webster defines a recession as “a period of reduced economic activity.” To assess market conditions, many economists look broadly at gross domestic product (GDP), the value of final goods and services produced in the U.S. If they see two consecutive quarters of declining GDP, they start talking about a recession.
As the official arbiter of economic cycles, the NBER uses a more nuanced definition: “A recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Instead of looking at GDP, the NBER looks at several economic indicators. Chief among them is inflation-adjusted income, consumer spending, manufacturing production, and unemployment. Once it detects several months or quarters of sharp declines in multiple indicators impacting large swaths of the economy, the NBER typically declares a recession.
How could a recession affect you?
Because this analysis is retrospective, a recession can be well underway and impacting your pocketbook before the NBER confirms what you’re experiencing, which can include any or all of the following:
- An extended period of rising prices in the cost of everyday goods, otherwise known as inflation
- Stagnate or declining income so you find it harder to make ends meet
- Job layoffs or a cut in hours or shifts because your employer is cutting its own expenses
- A tight employment market in which it’s hard to find a new job
How to protect yourself from a recession?
You can’t control many aspects of a recession, including the price of goods or its impact on your employer. But you can take charge of the things that are within your power, which includes the following:
1. Creating and maintaining a monthly budget
In good times, it’s tempting to pay as you go and let the chips fall where they may. But without a budget, it’s very hard to achieve your short- and long-term financial goals, whether that’s saving up to buy a house, open your own business or retire early. The smartest financial game plan is to live on a monthly budget no matter what the economy is doing. The sooner you adopt this strategy, the easier it will be to make the necessary budget adjustments when you feel or hear the rumblings of a recession.
Fortunately, many easy-to-use budget tools exist today. Microsoft 365 and Google Drive users can access personal monthly budget templates in spreadsheet format. For even more portability and functionality, you can download a budget app, many of which offer free versions, including Mint, PocketGuard and Wally.
2. Cutting back on spending
Even if your budget has plenty of wriggle room right now, it’s a good idea to tighten up your belt when trusted economic experts start warning about a recession. Start with these ideas:
- Delay a big-ticket purchase like a new car unless it’s absolutely necessary.
- Eliminate or reduce non-essential spending on things like subscription services, club memberships or entertainment.
- Choose cheaper alternatives for the essentials, such as carpooling or riding public transportation rather than driving to work alone.
- Shop generic brands for groceries and prescription medications while also using coupons and drug-saving apps.
- Reduce your utility bills by turning off lights when you leave a room, washing your clothes in cold water and turning your thermostat up a degree or two in summer and down in winter.
3. Limiting credit card purchases
Don’t forget to go through your credit card statement(s). If you’re unable to pay off your balance each month, it’s time to limit your charges and start paying down your credit card debt as quickly as possible. Because when a recession is in full swing—potentially making your income or employment less stable, the last thing you need is a significant credit card balance that’s racking up interest charges.
4. Starting or adding to an emergency fund
An unexpected expense, such as a steep car repair bill, can sting your budget in the best of times. During a recession, it can devastate your finances. An emergency fund is the solution. Financial experts recommend that this rainy-day fund have enough cash to cover between three to six months’ worth of expenses.
5. Making yourself more marketable to employers
One more thing. Protect your job security by exceeding your employer’s expectations. Meanwhile, in case you need to look for a new job, build up your resume credentials by volunteering for special projects at work or in your community, taking classes related to your profession or gaining expertise through certification programs.
Proactively implementing the above financial strategies and investing in your professional development should help you weather the next recession with the least amount of pain.