Recession Preparation: How Can You Protect Yourself?

A downturn in U.S. gross domestic product during the first quarter of 2025 got a lot of Americans talking about a recession. (Gross domestic product is the total value of all the finished goods and services produced in the country.) There’s evidence that people feel less confident about the economy and unemployment could rise. Reduced wages could lead to more people needing debt relief.

This doesn't mean a recession has started, or even that one's on the way. Even so, there are steps you can take to strengthen your finances whether we’re hit with a recession or not.  

Understanding what a recession is and how it can impact your finances could help you make better financial decisions in an uncertain economy.

What Is a Recession?

A recession is a phase of the economic cycle when economic activity declines. 

The economy goes through periods of expansion and contraction. Expansion means the economy is growing, and contraction means it's shrinking. When a period of contraction is significant enough, it's called a recession.

No two recessions are alike. For example, the Great Recession lasted 18 months, from December 2007 to June 2009. In contrast, the recession that was touched off by the 2020 pandemic lasted just two months, but the contraction was so severe it was considered a recession.

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What Happens in a Recession?

Recessions hurt companies and people. Some of the bad things that are likely to happen during a recession are:

• People lose their jobs. More than 20 million people lost their jobs, at least temporarily, because of the recession in early 2020.

• Company earnings decline. From Main Street to Wall Street, companies experience less demand for their products and services. Companies that sell staples like ordinary food products might weather a recession without much pain. But companies that sell big-ticket items like luxury cars or non-essential services like vacation travel typically experience a steep drop-off in revenue as people spend less. A recession could force some businesses to permanently close. That means permanent job loss for their workers, and the cycle continues.

• Credit becomes harder to get. With millions of families struggling, lenders will only risk making loans to people with excellent credit scores and strong finances.

• Stock prices fall. This may start to happen even before a recession officially starts, as investors anticipate weakening conditions. By the same token, stock prices may start to recover before the recession is over, as investors look ahead to the eventual recovery. 

How Will a Recession Affect You?

There's an old joke about the difference between a recession and a depression. A recession is when your neighbor loses his job. A depression is when you lose yours.

The truth behind that joke is that while an economic downturn affects a broad cross-section of the population, some feel the impacts more severely than others. 

Several factors determine how badly you're likely to be hurt by a recession.

How safe is your income?

Think about whether your employer tends to go through peaks and valleys of demand, or is more stable. Companies that experience extreme highs and lows may be hard hit in a recession.

Retailers of big-ticket items as well as travel and hospitality services may see a steep fall-off in demand. Also, in today's economy, those that depend on foreign suppliers may be hard hit by tariffs.

Finally, think about where you stand with your employer personally. Temporary employees and recent hires may be the first to be let go. Also, think about how strong your performance reviews have been.

How close are you to the financial edge?

If you've been living paycheck to paycheck and regularly relying on borrowing, things might get harder in a recession.

If you haven’t had much breathing room in your budget while the economy was good, making ends meet will probably be harder if you get laid off or your hours are cut. If lenders tighten lending standards due to a recession, you might not be able to get credit to fall back on.

Do you have any savings?

An emergency fund or assets you could sell quickly for cash are key resources. Anything that could get you through a bad period without running up a lot of debt will put you in a better position to navigate a recession.

This isn’t to say you should dip into your retirement savings. Doing so would likely have tax consequences and jeopardize your goals for saving for retirement.

Is your credit in good shape?

In a recession, lenders get pickier about who they'll lend to. If you have a strong credit score and a solid income, you may still be able to get credit. That could help see you through the temporary financial setbacks that may come with a recession.

Checklist: How to Prepare for Recession

For all the gloom and doom you may read about the possibility of a recession, it's important to remember that recessions are regular parts of economic cycles. There've been 12 recessions in the 80 years since the end of World War II, so it's not the end of the world. 

A big factor that determines how you get through a recession is the financial shape you’re in when it starts. Below are some things you can do to get your finances ready to survive a recession.

Cut unnecessary expenses

Just about everybody spends money on unnecessary expenses. Go through your spending to find things you can cut. Think about subscriptions, restaurant meals, or other expenses you could live without, at least temporarily.

Your goal should be to build a little extra cushion into your budget to make it easier to get through a possible loss of income or other financial setbacks.

Get rid of debt

Speaking of extra expenses, debt adds a lot to your cost of living. This is especially true of credit card debt. 

As you start to cut unnecessary expenses, put some of the savings toward paying down debt faster. This will create even more savings as you reduce interest expenses. You can also consider other debt solutions if you’re struggling. 

Work on your credit score

Paying down debt will help, and take extra care to make all your payments on time. Also, be selective about opening new credit accounts.

Recessions make lenders especially wary of taking risks. A good credit score will help you look more creditworthy.

Consider your career

Think of both your current job and making a career move.

Try to take on extra responsibilities and be helpful at your current job. Being a go-to person who others depend on makes it harder for an employer to lay you off.

At the same time, think about how marketable your skills are if you do lose your job. If your skills aren't up to date, find out if there's some extra training or coursework that might better prepare you for today's job market. 

Strengthening your job skills could solidify your current position and put you in good shape to make an upward career move once the economy starts getting stronger.

Build your emergency fund

An emergency fund is a recession survival tool. 

The thing about recessions is that not only do a lot of people lose their jobs, but job loss tends to persist. Following the last two recessions, over 40% of unemployed people were out of work for half a year or more. 

Unemployment insurance will help, but having a little savings of your own can supplement that and help you get through a period of joblessness. 

And Finally, What NOT to Do to Prepare for Recession

Here’s a quick list of things to avoid when preparing for a recession:

• Don’t make extreme investment moves. Markets tend to have wild swings as the economy goes into recession and then recovers. Trying to buy or sell to get ahead of those swings generally leads to people making the wrong moves at the wrong times. Stick to your long-term plan. 

• Say no to stress spending and retail therapy. Splurging on new clothes or the latest state-of-the-art smartphone may feel good in the moment. However, it's a temporary high. You'll soon come crashing down when the bills arrive and raise your financial stress even higher. 

• Don’t panic or hide your head in the sand. Skipping payments and ducking creditors will only make things worse. Your financial survival depends on facing the situation and planning ahead. 

Remember, a recession is just a temporary downturn in the economic cycle. Being prepared and staying calm will help see you through to the other side of it.

There's one more benefit to being prepared for a recession. Financial moves like cutting expenses, paying down debt, and building savings are great lifestyle changes that will benefit you long-term, including when the economy swings back up.