How to Prepare Your Finances for a Recession in 2022

Is a recession coming in 2022?

There’s no shortage of economists and financial “experts” predicting a recession soon.

And with inflation hitting a new 40-year high, rising interest rates, declining first quarter GDP in the US, and lingering supply chain issues, it’s no surprise that people are worried about a potential recession in 2022.

The thing about recessions is that it’s not a matter of if we’ll be in a recession, it’s when. We could be in one now, or we might not have one for another 10 years!

So even though we won’t know officially if we’re in a recession until the end of this month, it certainly seems like we’re heading that way.

So how do you prepare for a recession? More specifically, what should you do before a recession in order to prepare your finances to weather the storm?

This article will summarize a few things you can do right now to prepare for a potential recession this year.

Spoiler alert: these are all things that you should be doing no matter what is happening in the world, with the stock market, or with your job.

Remember that your financial plan should work well in the good times, and in the bad times.

If you’re wondering if your current financial track is good enough to weather a recession, continue reading for 5 ways to prepare your finances for a recession in 2022.

What is a Recession?

Investopedia defines a recession as “a significant decline in economic activity in a designated region.”

That’s a pretty vague definition, so typically experts designate a recession by 2 consecutive quarters of declining GDP.

Basically, people stop spending money and the economy slows down.

GDP decreased 1.5% in the first quarter of 2022, so if the second quarter of this year also has declining GDP, we will “officially” be in a recession.

How to Prepare Your Finances for a Recession in 2022

If the thought of a an economic slowdown has you doomsday prepping and wondering how you’re going to make your car payment if you get laid off from your job, keep reading for 5 ways to prepare for a recession in 2022.

This post may contain affiliate links, which means I get a small commission should you choose to purchase or sign up through one of my links, at no extra cost to you. I only recommend products that I personally use and believe in. You can read more about this in my disclaimer.

#1 – Have a Solid Emergency Fund (in Liquid CASH)

How long could you sustain your current standard of living if you lost your job tomorrow?

An emergency fund is 100% the most important line of defense you have in a recession.

It protects you from going into high-interest debt in case of an emergency (such as getting laid off from your job) and prevents you from having to cash out your investments at a loss, or sell your car, home, or other asset if you get in a bind.

I know that it sucks to keep a lot of cash hanging around with record inflation numbers, but you need to have some liquidity on hand to protect your precious assets in case something happens.

An emergency fund is an insurance policy for your wealth (and having cash on the sidelines will also help you sleep better at night).

It defends your assets against life’s biggest hurdles.

A good financial plan includes key components of offense and defense.

Just like in the NFL, they say “good defense wins championships.” Good offense might win games, but without a solid defense, you’ll be hurting in the long term.

Your emergency fund is your best defense to weather the game of life, especially during a recession. Recessions are when defense becomes crucial.

There have been 11 recessions since 1948. The last one you may vaguely remember (besides the COVID-19 crash) was the “Great Recession” in 2008.

I don’t know about you, but I was in middle school in 2008. If you’re a young, working professional like me, we’ve been pretty lucky with the amount of economic (and stock market) growth we’ve seen over the last decade.

A bull market characterized by above average returns for an extended period of time creates pretty confident investors. It’s easy to put money into your investments and almost always see the balance going up.

You might also think “what’s the point of keeping cash if I can earn 10 – 20% returns in the stock market?”

It’s easy to think that way when times are good, but the stock market does not go up every single year like clockwork. The stock market can be volatile, and actually go down in the short-term!

Recessions usually go hand-in-hand with this stock market volatility.

In the good times, it’s easy to YOLO your emergency savings into a brokerage account because “the market made 20% last year!” and you’re not worried about losing your job.

In the not-so-great times? You’ll want to make sure you have enough liquid cash to cover you in an emergency because your YOLO brokerage account “emergency fund” may be down 20 or 30 percent from its latest all-time high!

And the last thing you want to do is sell your shares in a market downturn.

So don’t skimp on your emergency fund, especially during a recession.

As Warren Buffet says, “when the tide goes out, you see who’s skinny dipping.”

Most financial experts recommend 3-6 months’ worth of expenses. If having more savings during a recession makes you feel more secure, go for it!

Related: How Big Should Your Emergency Fund Be?

#2 – Continue Investing

The second most important thing you can do to prepare your finances for a recession is to continue investing like normal. 

Unless your company is announcing mass layoffs or you have already been laid off, there is no need to panic and stop putting money into your 401k.

If you’re worried about losing money, it may be time to evaluate your time horizon and goal of investing in the first place.

Is this money for retirement? If so, will you need it in the next 5-10 years? If the answer to the last question is no, there is absolutely nothing to worry about.

However, if you’re YOLO investing your emergency fund or money for a home down payment that you want to use next year, you might be in for a rude awakening.

So don’t do that (keep money for short-term goals in CASH).

But please continue investing for those long-term goals, even during a recession when the stock market is down.

Think about it like this: when your favorite store has a 20% off sale, what is your initial reaction?

To go in there and buy stuff because it’s on sale!

Keep the same mindset with your investments- the stock market is on sale so you should buy more!

While it sucks to see your net worth and investment balances going down, remember that 1) you don’t need this money any time soon, 2) you still own the same amount of shares, they’re just trading at a lower price right now, and 3) the money you are contributing now will buy you MORE shares for the same amount of money because they’re trading at a lower price.

The more shares you acquire now while the market is down, the more fun the ride up to recovery will be!

Statistically speaking, the recovery after a bear market will give you the highest returns.

Meaning that if you have been investing throughout the bear market, buying in at those lower prices will yield a better return when the prices rise and return to normal.

For example, let’s say you buy a stock at it’s new all-time high of $100 on January 1st, 2022.

Let’s also assume there was a bear market that year, and the $100 stock lost 30% of it’s value and is now trading at $70/share.

The market recovers in the last quarter of the year, and the same stock is actually up 20% from it’s previous all-time high of $100, and closes out the year at $120/share on December 31st, 2022.

If you had bought the stock on January 1^st for $100 and stopped investing during the bear market, you would have had a 20% return (since the share went up $20 in value between January 1st and December 31st).

If you had bought the stock at the very bottom of the market for $70, your total return by the end of the year would be 58%!

And if you’re like most people contributing to your investments on a regular basis and you had kept investing throughout the bear market, your return is likely somewhere in between 20% and 58%.

This is obviously a very simple example, but it goes to show that buying into the market at lower prices will generate the largest returns.

We just don’t know how long the recovery will take or when the market bottom will occur. So keep buying into the market in your 401k, IRA, or taxable brokerage account!

Continuing to build wealth through investing during a downturn is a crucial way to prepare for a recession.

And if you’re totally confused on this whole investing and saving for retirement thing, check out this post about how to start investing for retirement.

#3 – Do Not Cash Out Your Investments

If you’re worried about your account balances decreasing, and it’s causing you to think about selling everything and keeping cash instead, I would highly advise against that.

The worst thing you can do in a market downturn is sell at a loss.

Not only will you officially lose money by selling shares at a lower price than you bought, but you’re ejecting yourself from the rollercoaster before the ride back up.

The only people who get hurt on a rollercoaster are the ones who jump off too early.

Don’t let that be you! You are in this for the long haul.

Start tracking the number of shares you own instead of the balance on your account.

Stop checking your accounts every day (guilty) and go live your life!

Automate your investing so you’re not tempted to log in as often.

Ignorance is probably bliss in a situation like this. Learn how to keep your emotional response at bay during a market downturn is crucial.

Reminding yourself to stay invested for the long term is a great way to prepare your finances for a recession in 2022.

#4 – Make a List of Things to Cut Out of Your Budget if Needed

Now that I’ve (hopefully) convinced you to keep a chunk of cash on the side, not sell out your entire retirement portfolio, and to keep investing like normal, let’s move on to a more actionable thing you can do to prepare for a recession.

Take a look at your current budget (if you don’t have a budget yet, I recommend creating one using this template!).

How much of your income are you spending every month? How much is left over?

What could you cut out if things really hit the fan and you lose your job?

You don’t need to cut these things out ~yet~ but having an idea of which subscriptions to ax, how to cancel your HelloFresh box, and being prepared to pause restaurant and clothing spending can help you feel more at ease.

Creating a “recession” budget before you really need to allows you to plan ahead.

Making a list of those items that can get cut out immediately and how much money it will save you will help you react faster if you lose your job.

When you lose your primary source of income, you’ll want to cut back as much as possible until you get on your feet again.

Your emergency fund will also be there to catch you, but the more money you can siphon off your basic living expenses, the longer your emergency fund will last until you find your next job.

Remember that the “rice and beans” life is temporary. Once you secure your next steady income source, you can resume a more “normal” standard of living.

Trimming expenses when needed is anther important part of financial defense, especially when you’re preparing your finances for a recession.

#5 – Pay Off High Interest Debt

You may have heard about the Fed raising interest rates lately.

Because we’re in a unique situation of record-high inflation AND potentially going into a recession, the Fed is in a weird spot when deciding what to do to “help” the economy.

Typically, during times of high inflation, the Fed will raise interest rates to combat it.

However, during a recession, the Fed typically lowers interest rates to encourage consumer spending in order to rebound the economy.

Since we have two unique scenarios with conflicting actions to combat them, it puts the Fed in a tough spot.

Do they continue raising interest rates to hopefully stop inflation? Or do they lower them again to get us out of the looming recession?

Let’s be real here: ever since the 2008 recession, we have been in an economic boom. Record-low interest rates made borrowing money “cheap.” 30-year mortgage rates in the sub-3% range, 0% financing for new cars, you name it.

The Fed has already taken action by raising interest rates 3 times this year. And they’re planning to continue raising rates throughout the rest of the year.

And since we’ve been in such an economic boom for the last decade, it looks like we are due for a correction (which can cause a recession).

When the Fed raises the federal funds rate, that means interest rates on EVERYTHING will go up. High-interest, non-secured debt rates are usually the most vulnerable.

Did you know that your credit card interest rate can go up at any time, for any reason?

Since people are worried about a potential recession, lenders will raise interest rates to account for the extra risk of someone losing their job and defaulting on their loan.

So, if you’re looking for a sign to pay off your consumer debt, this is it.

Not only are you tying up your monthly cash flow in debt payments and paying interest, those interest rates can go up during a recession as well!

(Let me be clear by saying that if you have a fixed-rate car loan, student loan, or mortgage, those rates are locked in and won’t change. The debt I’m talking about here are credit cards and variable-interest debts).

Paying off your high interest debt means that you won’t need as much money to get by every month, and you won’t be at the mercy of rising interest rates restricting your cash flow even more.

You also won’t have to worry about not making your credit card payment if you lose your job.

Not having debt payments means you can save that emergency fund faster, and take advantage of investing during a bear market.

So get rid of that credit card debt. Credit card debt really is the worst sin in personal finance.

Those of us without consumer debt and a fully-funded emergency fund in a high-yield savings account are positioned well to take advantage of opportunities during a recession.

Have you ever noticed how many campers, boats, and vehicles get sold at a discount during a recession?

Since many Americans are so financially vulnerable, selling their possessions is the first line of defense when they lose their job.

And since people in general are worried about losing their jobs, not many of them are out shopping for boats and RVs.

Thus, the people who own boats and RVs that those their jobs and don’t have an emergency fund put them up for sale at a discount because the demand for boats and RVs is low (and supply is high, since more people are trying to offload their depreciating assets to put food on the table), and it’s hard to find a buyer.

We have mitigated our risk of job loss by already living beneath our means, following a budget, and having liquid savings we can tap in a pinch if we need to.

The interest rates on our savings accounts are going up and we aren’t worried about paying hundreds of dollars more in credit card interest because we don’t have consumer debt!

Related: Debt Snowball vs. Avalanche Method: Which Debt Payoff Plan is Best for You?

To Summarize: How to Prepare Your Finances for a Recession in 2022

I hope this article helped you get some ideas of how to prepare your finances for a recession in 2022.

If I’m being honest, I think we are in one. It’s just a matter of time before the GDP numbers come in to officially call it.

You shouldn’t have much to worry about if you do these 5 things to prepare your finances for a recession. Playing both offense (investing) and defense (having liquid savings, paying off debt) appropriately with your finances will leave you in a good spot if you lose your job.

Keeping enough liquid savings to survive a job loss, continuing to invest, living below your means, and not carrying high-interest debt will help you weather the storm.

Recessions, inflation, and economic uncertainty are inevitable.

Focus on what you can control and we’ll get through it!

-Megan