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Seven ways you can financially prepare for a recession

If an economic downturn is inevitable in 2023, here are some ways to fortify your position

(Dado Ruvic/Reuters)
7 min

This is an updated column from Michelle Singletary’s archives. It originally ran on June 15, 2022.

High inflation, rising interest rates, a spike in gas prices and a volatile stock market have taken consumers and investors on a roller-coaster ride in 2022.

Even if you can’t bear to look at your retirement account, you know its value is down. The S&P 500 — a key gauge of market performance — has lost nearly a fifth of its value. Economic mayhem booted thousands of 401(k) participants out of the millionaire’s club. Several cryptocurrency companies crashed, not surprisingly, erasing billions of dollars of investments made by regular people, pension funds and others.

And you keep hearing that we may be in a recession or that one is inevitable.

If you remember the Great Recession and how harsh it was for so many, then telling you to “calm down” or that “this too shall pass” is unlikely to address the anxiety you’re feeling about your financial well-being.

It’s okay if you don’t feel things are okay.

Almost everyone expects a recession. Could the economy avoid one?

But what you shouldn’t do is make moves based on fears that can put you in a worse position financially.

Recessions don’t last forever.

An interest rate hike will affect anyone with a home mortgage, car loan, savings account or money in the stock market. (Video: Daron Taylor/The Washington Post)

On average, recessions last 11 months, according to Lindsey Bell, chief markets and money strategist for Ally Bank. The shortest one on record is the pandemic-induced 2020 recession, which lasted just two months, according to the National Bureau of Economic Research.

Here are seven tips to protect yourself whether a recession is coming or not.

1. Don’t be afraid of a bear market. You may not even know what a bear market is, but you’re primed to be petrified of one.

A bear market happens when a major stock index drops 20 percent from its most recent high. The S&P 500 slid into a bear market in mid-June.

Keep in mind, bear markets don’t last forever. Since 1950, the average one has lasted about 14 months, according to Anthony Saglimbene, global markets strategist for Ameriprise Financial.

“Just shift your view a little bit and look at this as an opportunity if you’re a longer-term investor,” Saglimbene said.

Focus on companies that have strong balance sheets, strong cash flow and products that consumers are using and need, he suggested.

What to do if stock market ups and downs are driving you nuts

Christine Benz, director of personal finance for Morningstar, said that “health-care and consumer-staples companies have often done well in recessionary environments because people need their products regardless of the economic environment.”

It’s a good time to take advantage of “dollar-cost averaging,” which means you invest the same amount of money regularly regardless of the ups and downs in the market.

Stocks historically recover well after a recession. If you don’t have exposure to stocks, you miss the eventual recovery.

“If you have the cash to put to work today, this is a good time to talk to an adviser and figure out what a good dollar-cost averaging strategy could be over time,” Saglimbene said.

2. Don’t try to time the market. A lot of folks may want to get out of the stock market or reduce what they’re investing until things get better. That is the definition of trying to time the market. It’s impossible to know the best time to get out and when to jump back in.

“Most people, most mere mortals, are not able to time the market,” said Mark Hamrick, senior economic analyst for Bankrate. “Even Warren Buffett would admit that.”

Once we reach the low point in the bear market, stock returns for the S&P 500 tend to be above average, Saglimbene said.

“One of the things we always coach investors and advisers to do is when you’re in the throes of either a recession or in a bear market, you don’t want to make outsized allocation adjustments until the dust settles,” Saglimbene said. “If you’re properly diversified, you’re weathering the storm. The worst thing an investor could do right now is to try to time the market bottom.”

In the long run, slow and steady stock-buying easily beats trying to time market dips, experts say

3. Get rid of your credit card debt. Now. “Job number one for anyone with a credit card is to pay off their balances as soon as possible,” said Matt Schulz, chief credit analyst at LendingTree. “When a recession may be on the way, and interest rates are rising rapidly, it’s even more important.”

One way to tackle the debt is to get a low-interest personal loan or sign up for a balance-transfer credit card. You can dig out of the debt a lot faster if you transfer high-interest debt to a credit card with a 0 percent rate.

If you can’t qualify for a 0 percent credit card, call your current credit issuer and ask for an interest rate reduction, Schulz suggested. “About 70 percent of people who asked for one in the last year got one. But far too few people ask.”

Four reasons a credit-card balance transfer may be a bad idea

4. Stockpile savings. Save while you have the extra money, because a recession can quickly change your circumstances.

If you don’t have a good emergency fund, consider canceling a planned vacation or putting off an expensive renovation project that isn’t necessary.

Though inflation may be easing, the Federal Reserve has signaled plans to continue raising interest rates.

You don’t want to resort to debt if you lose your job.

Also, consider that the standard advice of having three to six months’ worth of living expenses may not be enough.

The layoff survival guide: What to do before, during and after

“It makes sense for workers to right-size their emergency reserves based on their own situations,” Benz said.

Younger workers may have more flexibility in their lifestyle to get a roommate — or two — or switch career paths to take advantage of new job opportunities. So their emergency reserves can run closer to that three-to-six-month recommendation, she said.

But if you’re an older worker and can’t change your housing situation and/or you’re in a highly paid specialized position and replacing your income could take longer if you lose your job, err on the side of having a year’s worth of savings or assets you can easily liquidate.

Here’s why it may be time to break up with your bank

5. Establish a backup to your emergency fund. In addition to having a recession rainy-day fund, Benz recommends figuring out where you might go for additional funds if you needed them in a pinch.

“A home equity line of credit can make sense in this context, and it’s best to obtain it when you’re employed and most likely to qualify,” she said.

6. Don’t underestimate the power of bonds in your retirement portfolio. Typically when stocks are down, bonds balance out your stock holdings. But there’s been volatility in the bond market as well.

Still, in previous recessions, bonds have held up better than nearly any other market segment, Benz pointed out.

“In other words, don’t throw them overboard because they’re not performing well right now,” she said. “They’re an essential portfolio ingredient, especially for people who are in or getting close to retirement.”

‘Why is everything so expensive?’ The year of inflation frustration.

7. Get a side gig. Many employers are begging for workers. Near the end of 2022, the economy saw job gains in leisure and hospitality, health care and government, according to the Bureau of Labor Statistics. The unemployment rate was at 3.7 percent.

“But there is obviously a risk that unemployment could rise,” Hamrick said.

There have been significant layoffs in the tech and media industries.

Even if you don’t need the money right now, it may be a good time to get a second job or find work in the gig economy to boost your income and savings. Now’s the time to prepare for the worst and hope for the best.

B.O.M. — The best of Michelle Singletary on personal finance

If you have a personal finance question for Washington Post columnist Michelle Singletary, please call 1-855-ASK-POST (1-855-275-7678).

Recession-proof your life: The tsunami of economic news is leading consumers, investors and would-be homeowners alike to ask whether a recession is inevitable. Regardless of the answer, there are practical steps you can take to help shield yourself from a worst-case scenario.

Credit card debt: Carrying credit card debt is never good and you should ditch the habit. Here are seven ways to lower your credit card debt in light of the Fed continuing to raise interest rates.

Money moves for life: For a more sweeping overview of Michelle’s timeless money advice, see Michelle Singletary’s Money Milestones. The interactive package offers guidance for every life stage, whether you’re just starting out in your career to living an abundant life in retirement.

Test Yourself: Do you know where you stand financially? Take our quiz and read advice from Michelle.