How to Manage Your Money During a Recession

With the cost of living continuing to rise, we’re all feeling the strain on our bank accounts.

One question looms large in our minds: Are we in a recession?

Ummm, Amanda, that’s stressful AF. I do not want to even think about that.

Listen. It is totally stressful. However, with careful planning and a calm approach (the sky isn’t falling, Henny Penny), you can confidently handle your money if a recession strikes and still come out Britney Jean Spears Stronger on the other side.

Are We in a Recession?

Okay, so let's start by defining what a recession really is.

A recession is when economic activity (consumer spending, company profits, employment rates, all those kinds of things) is down for a longer period of time.

How long does economic activity have to be down for it to be considered officially a recession? At least two quarters (six months).

In other words, a recession means we have been spending less money than normal, unemployment rates are up, and companies have been profiting less for at least six months.

But there is no need to panic because as long as you carefully plan and prepare accordingly, you will survive even if the news headlines are spitting out spicy headlines!

Start by reviewing your current financial situation, and assess your income, expenses, and savings.

A detailed budget will provide a clear picture of your financial standing and help you identify areas where you can cut costs. It doesn’t have to be overly complicated, either. Just get an understanding of what’s coming in and what’s going out.

It's normal to feel anxious about all of this. However, it's important to stay calm and level-headed. Panic can lead to irrational decisions that may harm your financial well-being and make an already bad situation worse. A clear mind is your bestie when preparing financially for a recession and managing your money during a recession.

Remember that economic downturns are a natural part of the economic cycle. As the kids would say, sometimes it just be like that.

While this can be really challenging, difficult economic times present opportunities for growth and learning. Stay confident in your ability to adapt and make sound financial choices. You are a badass, and you know what you’re doing. You’ve got this!

Building a Recession-Proof Emergency Fund

So you already know you need an emergency fund, but you might need to beef it up a bit during a recession.

Ideally, your emergency fund should cover at least three to six months of living expenses (more if you are the breadwinner in your family, support other people, and/or work in a field or career that’s more difficult to find employment opportunities in). If you currently have a smaller fund or none at all 👀, prioritize building it up. And by prioritize, I mean do not pass GO, do not collect $200, and if you do collect $200, put the damn thing in your emergency fund.

Seriously though, you should consider diverting a portion of your income into this fund until it reaches a comfortable level.

Calculate your monthly expenses, including housing, utilities, food, transportation, and other necessities. This figure will help you determine the minimum amount your emergency fund should hold to sustain you.

If it makes you feel more comfortable, you can save an additional three to six months of living expenses for those uncertain times like recessions. You never know what’s going to happen, and we don’t want to panic, so we want to be prepared.

Increasing your emergency fund might involve making temporary lifestyle changes, like cutting discretionary spending or finding additional sources of income.

No matter how you get there, you’ve got to take this first step. 

Managing Your Budget During a Recession

Your budget is your financial roadmap, and revisiting it during a recession is essential.

Revisit your budget

Take a close look at your budget and identify areas where you can trim expenses. Prioritize your needs over wants and allocate resources accordingly. Be prepared to make necessary adjustments.

These may be some lean times, and you might be forced to cut out some fancy extras. Just remember, it’s temporary. Nothing lasts forever.

Account for inflation

During a recession, inflation may decrease your money's purchasing power. When planning your budget, it's important to account for this by factoring in potential price increases (ahem, groceries).

Plan for adjustments in your emergency fund

If you need to dip into your emergency fund during the recession, be sure to include replenishing it in your budget once your financial situation stabilizes.

Focus on tackling debt

Reducing or eliminating high-interest debt is crucial as it frees up more of your income for essential expenses.

Track your spending

Keep a close eye on your cash flow to help you make informed decisions. Monitor your income and expenses regularly and adjust your budget as necessary.

Protecting Your Investments During a Recession

Investments are a critical component of your finances, and how you manage them during a recession can significantly impact your long-term financial goals.

Don’t panic!

First and foremost, resist the urge to panic when it comes to your investments. Recession-related market volatility is normal, and selling investments in a panic can lead to significant losses and put you even further behind once the economy stabilizes. Remember, the stock market ALWAYS recovers!

Don’t pull money out

If possible, avoid the temptation to withdraw money from your long-term investments, especially retirement accounts. Instead, focus on your short-term savings and emergency fund for immediate needs.

Don’t neurotically check balances

Constantly checking your investment balances can lead to stress and potentially poor decisions. Things will feel like 2007 Lindsay Lohan-level messy for a minute, but it’s going to be okay.

Remember that investments fluctuate, and short-term losses are a part of long-term gains.

Consider investing more while prices are low

During a recession, stock prices often drop significantly. It may seem counterintuitive, but if you have the financial means and aren’t planning to retire soon, consider buying more stocks while prices are low. It’s like the market is on SALE! This can position you for future growth when the market rebounds.

Remember, when in doubt, zoom out

In times of economic uncertainty, it's essential to maintain a long-term perspective.

Economic downturns are temporary, and the market recovers over time. Keep your financial goals in mind, and remember that short-term fluctuations are just a blip on the radar in the grand scheme of things.

The market has never not recovered! 

Wrapping Up

Whether we are in a recession or not, you should prepare yourself and your finances for economic uncertainty.

You don’t have to live like the world is ending tomorrow, but by carefully planning, staying calm, and staying confident, you’ll be able to weather the storm if and when recession does strike.