Ask a dozen economists if we’re heading for a recession, and you’ll get a dozen different answers. What they’ll likely have in common, though, is a gloomy outlook on the immediate future. Between inflation, low economic growth, continuing supply chain problems from the pandemic and the war in Ukraine, the Federal Reserve’s interest rate hikes, and continued COVID disruptions in China’s economy, the economic picture just isn’t very rosy.
A recession always has a massive impact on the real estate market. Seeing property values slide, sellers start to panic, and instead of doing a traditional agent-assisted sale, maybe they resort to a quickie cash buyer company, or even try to sell their home themselves. As interest rates go up, mortgages become more expensive, and harder to qualify for, which makes it harder on buyers — and as demand wanes, home values sag. It’s a troubling spiral that’s tough on everyone.
So if a recession is coming, how can we prepare? Most of the tips from financial experts are pretty straightforward: put money away, get your budget in order, and hold on. Let’s go over the 20 ways to financially prepare for a recession!
1. Go over your income and expenditures
First, look at how much money you have coming in. Then look at your recurring expenses like mortgage or rent, phone and utility bills, medical costs, groceries, etc. For a start, you want to be spending less money than you have coming in. If not, as you find that you’re relying on credit cards or loans to make up the gap each month, eliminate as many expenses as you can, starting with discretionary spending like restaurants, clothing, and entertainment. (Financial experts say you should spend no more than 30% of your income on discretionary goods and services.)
If you sell your house, look into working with a discount real estate agent — this can save you thousands of dollars.
If there are areas where you spend much more than others, investigate why, and come up with a strategy to reduce spending in that problem area.
2. Make a "recession budget"
Once you have a good idea of how much money you’ve got coming in, and what your necessary expenses are (rent/mortgage, groceries), you should come up with a barebones budget that you can revert to if you or your partner lose your jobs, or if you experience some other kind of financial adversity. This will give you an idea of your financial "baseline."
3. Assess your liquidity
If you have a lot of your net worth tied up in investments, you’ll want to check in and make sure you have enough cash on hand to handle any immediate needs. Double-check the balances of your accounts, and think about where you might be able to acquire cash quickly in an emergency— including last resort sources like your retirement accounts or a home equity line of credit (HELOC). Just keep in mind that if you think you might need a HELOC in the future, you should apply for approval now, while you still have income; if you don’t have any income when you apply, you won’t be approved.
4. Set aside an emergency fund
Experts suggest having three to six months of living expenses in an emergency fund. If you have less than that put away — and many Americans don’t have that — try to allocate as much money as you can into your emergency savings, until you’ve reached that six months of expenses threshold.
5. Draw up a "debt priority" list
If you do experience a reduction in income, you may have trouble making all your debt payments.
Make a list of all your debt payments, and then separate them into tiers, from most urgent to least urgent. At the top, you’ll want to put your rent or mortgage, since they keep a roof over your head. Next, is your car payment, especially if you depend on your car to get to work or school.
If you have student debt, you can contact your lender and ask for a hardship application, which can get you a few months of relief from payments. If you have credit cards, you’ll want to scale back to minimum payments; if you can’t make those, you can contact your lenders and let them know; while this will likely freeze your credit accounts, you can probably work out a payment plan with them.
6. Always reach out to your creditors
Most lenders will work with you on a payment plan, especially if you’ve recently lost your job. Setting up an arrangement with your creditors is much better for your state of mind and your credit rating than simply ceasing all payments.
From this point on, you should have a "negotiation" mindset. Try to settle your debts for less than the full balance, haggle for a slightly better rate, or ask for longer payment terms. It’s surprising how many concessions you can get just by asking — you can even negotiate big fundamental costs.
7. Cultivate multiple income streams
You can’t necessarily count on your full-time job if a severe recession hits, so additional sources of income can be a great source of psychological and financial comfort.
This can mean doing consulting work on the side, buying an investment rental to generate cash flow, starting a small business out of your home, selling things online or through social media, or even something like an innovative income-generating app. Just get money coming in from as many sources as possible, so if you lose one source, you have backups.
8. Stay oriented toward the long term
If the market experiences a downturn, the value of your investments will drop; in a full-on recession, the stock market may drop by up to 40%. But from a certain perspective, this doesn’t matter all that much. Rental investments you own will still generate cash flow even if property values drop. Stocks will dip and then start climbing again, and if your retirement accounts drop, they’ll very likely recover before you need them in their entirety. Remember, you don’t need your entire retirement fund the day you retire — just a small portion of it.
9. Don’t panic
As we said, a recession will likely bring down the value of your property, as well as any stocks you own. Prepare yourself for this inevitability, and get ready to weather the storm. After all, if you sell after the downturn but before the recovery, all you’re doing is turning your paper losses into actual, irreversible losses. Your investments will recover their value — just be patient, and don’t give in to the impulse to panic sell.
10. Be honest about your appetite for risk
Look at your investment portfolio and ask yourself if you can sleep easy if your stocks lose 15-20% (or more) of their value in a recession. If you can’t tolerate this kind of drop, move out of your positions now, before the market declines, and put your money into something safer, like blue-chip stocks, or bonds, or simply convert them to cash reserves so you can take advantage of post-correction bargain prices.
11. Diversify, diversify, diversify
Similar to our advice about cultivating multiple income streams so you won’t be devastated if one of them evaporates, you’ll also want to diversify your investments to spread the risk around. If you have most of your money in one investment, move a good portion of it to other investments; for example, many experts suggest putting money in non-correlated investments like stocks and bonds, which means that when one is up, the other tends to be down, and vice versa.
12. Maintain a good credit score
In a recession, credit markets tighten up. Lenders give out fewer loans and their standards are higher. If you anticipate needing credit during the downturn — if, for example, you think you might want to pick up another investment rental while property values are depressed, you’ll need a pristine credit score to qualify for a mortgage.
How do you keep your credit score high? Some simple ways are paying your bills on time, maintaining a low debit-to-available credit ratio, and keeping your oldest credit cards.
13. Pay down your high-interest credit cards
Speaking of credit cards, high-interest debt is very costly to carry, so you’ll want to pay it down as much as possible to prepare for lean times. If you find yourself unable to make payments on your credit card debt, the interest rate and fees will very quickly cost you hundreds or thousands of dollars a month.
If you aren’t able to pay down your credit card debt completely, consider transferring your balance to a balance transfer card with a low (or zero) introductory APR.
14. Recession-proof your career
One of the best ways to ensure yourself a stable income is to recession-proof your career by pursuing higher education. Statistics are clear that the unemployment rate is lower among bachelor’s degree and advanced degree holders, so earning degrees and certifications in your field of expertise can make you indispensable when the recession hits.
Another approach to this is to learn skills that make you broadly employable, so if you do lose your primary job, you’re able to search in adjacent fields.
15. Maintain the proper perspective
A recession isn’t an apocalypse; it’s more like bad weather. The definition of a recession is a drop in output for two consecutive quarters, and that’s happened 33 times in U.S. history. Each time, the economy has not only recovered but boomed afterward. A recession can be tough to weather, but it will pass.
16. Come up with a strategy for your student loans
If you’re one of the nearly 13% of Americans with student debt, you should think about how you’re going to continue to service that debt during a recession. Federal student loan payments are suspended without interest until September 1, so in the short term, not paying could be a viable option. But if you have a steady income right now, paying down your student loans now, during a period of zero interest, could get you way ahead of the game.
However, if you experience a financial shock during the coming recession, and the pause on repayments has been lifted, you do have some options. You can opt to get onto an income-driven repayment plan, which limits your payments to a certain percentage of your income. You might also qualify for deferment if you’re unemployed for an extended period, though interest will accrue during that time. And finally, you can request a pause on your student loan payments, to give you a little breathing room while you regroup.
If you have private loans, contact your lender. The majority of private lenders do offer some kind of payment deferral or forbearance if you’re under severe financial stress.
17. Consider taking advantage of the buyer’s market
When property values and stock prices drop, a lot of investors are too spooked to buy in. That’s only natural. But a recession is often the best time to invest, with prices at decade-long lows. And with lenders tightening up their lending standards and offering fewer loans, you’ll have much less competition than usual. If you have stellar credit or a lot of cash on hand, you can buy that big, life-changing real estate investment you’ve had your eye on at a steep discount.
Just don’t get too opportunistic, or you may end up buying a property that leaves you with major, lasting regret.
18. If you’re selling your home during the recession, prepare for slackening demand
When a recession sets in, lenders will give out fewer mortgages, which means there will be fewer qualified buyers out there. For you, the home seller, that means buyers will have some leverage, and you may have to make some concessions if you want to get your sale across the finish line.
An effective way to time your sale is to monitor the amount of inventory in your market. Regardless of home prices, if you sell when inventory is very low, you should be able to execute a quick, lucrative sale. Likewise, if inventory is very high, you should try to hold off until a moment that’s more advantageous to you.
19. If you’re buying a home during the recession, you should have a relatively smooth ride
After years of a red hot seller’s market, a recession will shift the balance of power more towards buyers. And if you’re one of the lucky few who can get approved for a mortgage (or have enough cash on hand to buy outright), you’ll not only be able to choose from a wide inventory of homes, but you’ll also be able to aggressively negotiate on price and various seller concessions. Since there will be fewer buyers on the market, you’ll have more bargaining power — so make sure you use it!
20. If you’re renting during the recession, prepare for increasing rents
In a recession, lenders give out fewer mortgages, and many people who lose their jobs may have to fall back on savings — which may have been earmarked for a down payment on a house. All those would-be buyers are now going to rent until things recover, which means rents are going to start climbing. Start preparing now to pay higher rents, and if you get hit with the double whammy of skyrocketing rents and job loss, consider taking in a roommate or two to lighten your financial burden.