Written by: Mike Zarrelli, CFP®, EA | FS | FSA Wealth Partners
“What Are All the Smart People Doing to Prepare for a Recession?”
Great question, right? That’s what clients have been asking recently. While no one knows exactly when the next recession will hit, preparing for a turbulent economy and volatile markets is always a smart move. Here are five steps you can take to make your financial life more recession-resilient:
1. Build Up Extra Cash
I’m not saying sell your stocks to create cash. However, if you have extra cash flow, start padding your emergency fund. This buffer can help cover an unexpected job loss, prevent panic-driven investment decisions, or give you dry powder to buy assets when they’re on sale. It also provides peace of mind during stressful times, which is valuable even if it’s not the most “efficient” use of your money.
The right amount depends on your situation:
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Are you a single or dual-income household? With only one income, you may want a bigger cash cushion.
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Have kids or a mortgage? A larger safety net is smart.
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Just feeling nervous? That’s a valid reason to save more.
A common rule of thumb is to have 3-6 months of expenses set aside. From my experience, 3 months is the bare minimum. I personally keep more cash on hand, because I’ve seen how helpful it is when life throws multiple curveballs like a home repair, followed by a car issue, followed by a job change. Having cash on hand makes these situations much easier to manage.
2. Understand Your Cash Flow
Knowing where your money goes each month can make you a budget Jedi. If the economy takes a turn, this lets you quickly identify where to cut spending with your lightsaber without going into debt or selling investments at a loss.
Budgeting apps can make this a lot easier. We've seen clients:
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Cancel subscriptions they no longer use
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Cut back on dining out
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Delay major purchases
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Pause renovation plans or vacations
In times of market stress, your personal finances need to be flexible. If things seem uncertain, be ready to tighten the belt or hold off on big spending commitments. Once the economy stabilizes, you can ramp up spending again and probably enjoy it more since you waited (hello, delayed gratification)!
3. Reassess Your Risk (Before the Market Drops)
Zoom in on any year, and there’s always something to worry about; wars, recessions, politics, the list goes on. But there’s one common truth: panicking has never been a smart strategy.
The worst time to change your investment approach is after the market has already dropped. Emotions run high, potentially leading to decisions that can be panic-driven and reactive. It’s better to review your risk tolerance now, while your head is clear.
Start by:
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Reviewing your current asset allocation
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Taking a risk tolerance quiz
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Talking to an advisor
Decide if you need to make changes now so you’re better equipped to stay the course when the next downturn hits.
4. Have a Plan for the Next Opportunity
If you’ve already taken steps 1-3, then the next correction could be a huge opportunity for you.
- In 2008, those with cash bought cheap stocks and real estate.
- In 2020, the S&P 500 dropped 30%+ but ended the year up 18%.
- In 2022, those who were ready were rewarded in 2023 and 2024.
As Warren Buffett says, “Be greedy when others are fearful.”
So, how will you respond when the next correction comes?
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Will you dollar-cost average?
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Invest a lump sum?
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Buy index funds or individual stocks?
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Max out your Roth IRA?
It’s a lot easier to follow through when you’ve already decided what to do. When headlines are bleak, even seasoned investors hesitate. Having a clear plan ahead of time gives you confidence to follow through with your strategy when it counts.
5. Invest In Yourself
No matter what’s happening in the economy, investing in yourself is always a smart move. In a recession, it becomes even more important. As the unemployment rate rises, there are more applicants for fewer job openings. That’s when skills, experience, and a strong work ethic help you stand out.
Improving your skills can:
- Increase your chances of surviving job cuts
- Help you pivot to new roles or industries if needed
- Boost your earning potential when the economy rebounds
It really separates those who were prepared from those who weren’t. Always be a learner!
Bottom Line
Preparing for a recession isn’t about trying to time the market. It’s about strengthening your personal finances enough to weather whatever storm lies ahead.
I like to think of it like a barbell:
On one side, keep your personal finances conservative with a strong emergency fund, manageable low-interest debt, and a solid savings rate. On the other side, stick with your investment strategy and be ready to take advantage of opportunities that could help grow your wealth over the long run.
As Charlie Munger said, “The first rule of compounding is to never interrupt it unnecessarily.”
Having a bear market game plan gives you confidence. Stay prepared. Stay patient. The smart money plays the long game!
Related: Financial Advisory Fees: How Much Should You Really Be Paying?