7 Financial Do’s and Don’ts to Follow During a Recession - Experian (2024)

The thought of a looming recession can understandably make you feel uneasy about your finances. During a recession, employers pull back on their investments in new and existing employees, consumer demand is typically down and the cost of living can increase. These factors and more can affect your ability to earn an income and cause your expenses to rise.

Fortunately, you can do things—and avoid things—to help survive a recession. Here are seven do's and don'ts of saving during a recession.

1. Do: Keep Investing for Retirement

It might be tempting to stop setting aside money for retirement amid a recession. However, try to keep investing for retirement so you don't miss out on tax advantages available with certain retirement accounts. For instance, contributions to a traditional IRA are tax-deductible, and contributions to an employer-sponsored 401(k) aren't included in your taxable income.

Furthermore, if you halt contributions to a 401(k), you might miss out on your employer's matching contributions. On top of that, cutting off deposits into retirement accounts means the growth rate of your accounts will slow, perhaps triggering a longer timeline for achieving your retirement goals.

It's also worth noting that if prices of stocks, mutual funds, exchange-traded funds and other investment products slump during a recession, it could present a buying opportunity.

2. Don't: Panic Sell Assets

When the economy takes a tumble into recession, some nervous folks sell assets—namely stocks and other investments. A mistake like this could be a costly one. Selling your investments locks in your losses, something you could have otherwise avoided by holding on.

Investment firm Morgan Stanley notes that an investor who stuck with the stock market through the various recessions that occurred from 1980 to February 2022 would have racked up a 12% annual return. Meanwhile, someone who began investing at the same time but dumped investments after downturns and remained on the sidelines until two consecutive years of positive returns would have realized an average annual return of 10%.

Let's look at how those two strategies would have affected an investor who invested $5,000 per year. The investor who stayed the course during that period would have wound up with $4.3 million, according to Morgan Stanley. By contrast, the investor who sold investments during that time and sat out the stock market for a while would have ended up with $2.5 million.

Trying to time the market can have negative consequences for your portfolio. Instead, try to think long-term with investing and ride out the short-term ups and downs.

3. Do: Keep Your Savings Liquid

As you're trying to make it through a recession, you ideally should keep your savings liquid (aside from the money you've got stashed in retirement accounts).

When your savings are liquid—kept in a savings account or money market account, for example—you've got easy access to cash in case you need it right away. But if you own a non-liquid asset like real estate, a car or jewelry, it typically takes longer to convert that asset into cash. In addition, if you price a non-liquid asset below its value to gain fast cash, you'll lose money on the deal.

Keeping your savings liquid during a recession can be particularly critical if your employer lays you off. As of February 2022, only 27% of U.S. households could cover expenses for more than six months by borrowing money or dipping into savings after losing their main source of income, according to a study from the Consumer Financial Protection Bureau (CFPB). Meanwhile, 21% indicated they'd be able to squeak by for less than two weeks.

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4. Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand.

Chances are your highest-interest debt is credit card debt. Taking as big a bite out of that debt as possible frees up money that you can put toward basic needs during a recession. The CFPB estimates that from 2018 to 2020, each U.S. household shelled out an average of about $1,000 in credit card interest and fees.

In the midst of a recession, use some restraint when it comes to piling up more high-interest debt. If need be, put your credit cards aside for the time being and stick to paying for things with cash—and focus on getting rid of high-interest debt.

5. Do: Reduce Spending

Curtailing your spending during a recession can also put your finances in a better position. But where do you start?

Data released in 2022 by the Bank of America Institute suggests that during recessions, U.S. households zero in on trimming these items from their budgets:

  • Furniture
  • Travel
  • Dining out

Other non-essential purchases to consider freezing during a recession include:

  • Subscriptions (such as streaming services)
  • Clothing
  • Delivered meals
  • Entertainment
  • Gifts
  • Elective medical procedures

To help put your spending on a diet, consider coming up with a budget. This could be as simple as writing down income and expenses on a piece of paper, or adopting a more sophisticated method such as a spreadsheet or a budgeting app.

6. Don't: Make Big Purchases

Conserving money during a recession often translates into delaying purchases of big-ticket items. Questions you might ask yourself about purchases you're pondering include:

  • Do I really need a new car, or can I get more mileage out of the car I'm driving now?
  • Will it really make a difference if I watch my favorite shows on my 45-inch TV rather than upgrading to a 75-inch TV?
  • Can my washer and dryer churn through a few hundred more loads of laundry?
  • Can I put off buying a house and continue renting an apartment?
  • Can my mattress support me through a few hundred more nights?
  • Will my current laptop computer get the job done for now?

7. Do: Build Your Emergency Fund

There's no better time than a recession to ensure you have enough money put away in case you experience a job loss, an unexpected hospital stay or a huge car repair bill.

A 2022 survey from the Achieve Center for Consumer Insight found that more than half of the adults questioned had less than $1,000 in an emergency fund, including 28% who said they had no emergency savings at all. Worse yet, two-thirds of those surveyed said they were living paycheck to paycheck.

Perhaps more alarming: Although far more people said they'd decrease spending on dining out, entertainment and vacations if they had to cover a surprise expense or an employment or income disruption, others said they'd cut back on essential expenses such as:

  • Groceries: 31%
  • Credit card payments: 14%
  • Health care: 9%
  • Retirement savings: 8%

During a recession, an emergency fund can be a financial lifesaver. Experts generally recommend that an emergency fund contain enough money to cover three to six months of living expenses.

Riding Out a Recession

A recession can be a scary time, particularly when you're on edge about whether you'll hang onto your job. But you can do (and not do) a number of things to ease your worries and shore up your finances. This includes lowering the amount of high-interest credit card debt you're carrying. One way to accomplish that is by obtaining a balance transfer credit card that offers a low or even 0% APR (annual percentage rate) for an introductory period like 12 or 15 months.

7 Financial Do’s and Don’ts to Follow During a Recession - Experian (2024)

FAQs

7 Financial Do’s and Don’ts to Follow During a Recession - Experian? ›

What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.

What should you not do during a recession? ›

What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.

Should I take my money out of the bank before a recession? ›

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

Is it better to have cash or property in a recession? ›

Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.

Where is your money safest during a recession? ›

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

What is the best thing to do with money in a recession? ›

There is no recession-proof strategy for keeping investments safe during recessions. However, savings accounts will help with potential income loss, and investments in bonds and consumer staple stocks can often help limit your losses and may even record gains.

Is cash king during a recession? ›

Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.

Can banks seize your money if the economy fails? ›

The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.

What is the best asset to hold during a recession? ›

Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
  • Defensive sector stocks and funds.
  • Dividend-paying large-cap stocks.
  • Government bonds and top-rated corporate bonds.
  • Treasury bonds.
  • Gold.
  • Real estate.
  • Cash and cash equivalents.
Nov 30, 2023

Is it smart to have cash in a recession? ›

Having enough cash on hand can limit the need to sell assets when the market is down, a misstep that could drain your retirement balances faster. Of course, the exact amount of cash to keep on hand in retirement depends on monthly expenses and other sources of income.

How much cash should I have on hand during a recession? ›

GOBankingRates consulted quite a few finance experts and asked them this question. They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.

How to profit from a recession? ›

Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.

Should you stock up on food during a recession? ›

All Americans should have at least a three-day supply of food and water stored in their homes, with at least one gallon of water per person per day. If you have the space, experts recommend a week's supply of food and water. Choose foods that don't require refrigeration and are not high in salt.

What makes the most money during a recession? ›

Generally, the industries known to fare better during recessions are those that supply the population with essentials we cannot live without that. They include utilities, health care, consumer staples, and, in some pundits' opinions, maybe even technology.

Should I take my cash out of the bank? ›

You should only take your money out of the bank if you need the cash. In the bank, cash is less vulnerable to theft, loss and disaster. And depending on the bank account, you could be earning interest on your cash that you won't be earning if it stays under your mattress.

Who gets hurt the most during a recession? ›

Which Industries Are Most Affected by a Recession?
  • A recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.”
  • Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.
Nov 14, 2022

Should you keep cash at home during a recession? ›

During economic downturns you want to have as much cash on hand as possible. If it is not absolutely necessary, it may be best to delay any big-ticket purchases. Big purchases, such as a car or house, typically require you to either put down a large lump sum of cash or have a hefty ongoing payment.

Do things get cheaper during a recession? ›

During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments.

How much money should you hold in a recession? ›

GOBankingRates consulted quite a few finance experts and asked them this question. They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.

What does a recession mean for the average person? ›

What happens during a recession and how would it affect me? During a recession, there's less money circulating: less money for workers from their employers, less money being spent in shops and restaurants, and less money going to the government in tax from wages to pay for things like benefits and public services.

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