Another Recession Is Coming. How Should You Prepare?

Have you read the financial news lately? Even if you've just scanned the headlines this year, you've probably noticed a lot of people discussing the dreaded R-word: Recession. Inflation and interest rates are both high and – if left unchecked – those are a dangerous combination for the economy.

Now, longtime readers of my Keep It Easy newsletter know that I think financial forecasts are complete bullshit. No one can predict the future, but that doesn’t stop people from trying. But one thing I know we can count on with extreme certainty: another recession is coming. It will happen. And the one after that. And the one after that one, too. Even though no one wants it to be true, recessions are just part of the economic cycle. They are as unavoidable as they are unpredictable.

So while I don’t know exactly when the next recession will happen, I am completely confident that it will happen eventually. And, if you remember the episode about making financial plans with an up & down income, you know that when something is unpredictable but inevitable, you can make a plan for it.

What is a recession?

A recession is a significant decline in economic activity across the economy, usually measured in terms of Gross Domestic Product (called GDP, or the total value of goods and services produced within a country). In everyday language, though, a recession is simply an extended period of time when the economy isn't doing well. Businesses make less money, people might lose their jobs, and it's harder for everyone to afford things they need. It's basically a tough financial time for a whole bunch of people, companies, the country, or the whole world – all at once.

How common are recessions?

Despite how much planning goes into preventing them, recessions are actually fairly common. According to Investopedia.com, the U.S. has been through 14 recessions since the Great Depression ended about 84ish years ago. That works out to an average of about one every 6ish years. So are we on the verge of the next recession?

Well, it's been about 16 years since the so-called great recession ended. And if they historically happen about every 6 years, that means the odds are not really in our favor.

Regardless of when it happens, though, we can be confident that another recession will happen. Live long enough and you are likely to see many more recessions in your lifetime.

What can you do now to prepare?

So if we know that another recession is inevitable and that we’re kind of overdue for one, what can you do now to prepare? Here are 4 ways that you can build financial stability and security before the shit hits the fan:

• Build an Emergency Fund: Everyone should aim to keep enough money in an interest-bearing, FDIC insured cash account – in other words, a savings account – to cover 3-6 months' worth of essential expenses. That can be the difference between navigating a downturn in relative comfort or total panic. Knowing that you’re covered for the next 3-6 months if you lose your job or experience a serious financial setback can help you sleep a lot better at night. And a healthy amount of cash can also prevent selling investments at the worst possible time just so you can cover your bills. And If you have an up & down income, I would suggest bumping that target up to 6-12 months’ worth of cash in a savings account.

• Reduce Debt: While it might not feel like a big deal to carry a debt balance now, it will quickly become unmanageable if your income slows or stops. Focus first on high-interest debt like credit cards and personal loans – rather than high-balance loans like mortgages and auto loans – since these high-interest debts can become a significant burden during tough times. I really recommend focusing on reducing or eliminating high-interest debts as much as possible.

• Understand your spending: We all pay for things or experiences that are nice, but not necessary – and that's totally fine. But understanding the difference between "nice to have" and "need to have" expenses becomes essential during a recession. So which expenses could you cut if necessary? Which could you reduce? Knowing the minimum income you need to cover basic spending will make a lot of decisions easier during a recession – and save you a lot of headache. For tips on managing your spending, check out this post on Low-Tech Cash Flow.

• Invest Appropriately: Here’s a super common – and super unfortunate – investing mistake that tons of people make: they waaayyy overestimate how much risk they can handle when the market is going up & up & up, then waaayyy underestimate the appropriate amount of risk when the market drops. That results in lots of people buying high & selling low, which is pretty much the textbook definition of what you don’t want to do. So ask yourself: how confident are you that your investment mix matches your time horizon and risk tolerance, even if the stock market drops? If your answer is anything less than total confidence, then now is the time to review your investments to make sure you have the right stuff in your accounts. Holding the right mix of investments can help smooth out those rough patches and actually reduce the downside when the market drops, and that will help you avoid selling at the worst possible time.

Remember that the key is preparing for the next recession to make yourself more resilient and flexible well in advance. A strong cash savings, lower debt exposure, a clear understanding of what you do (and do not) need to spend, and owning investments that match your risk tolerance & time horizon can help you weather the bad times and open up new possibilities during the good times. I am confident that any and all of those strategies will help you be better prepared for economic uncertainty and improve both financial stability and security.

So when the next recession comes (and it will), remind yourself that it is just something that happens every so often. And, because you’re such a smart person and read this post and prepared in advance, you know that you’re in the best possible position you can be in to get by a lousy economy.

If you’re curious about your current financial well-being or looking for potential weak spots that could use your attention, go ahead and send me an email. I’ll send you some resources to help you spot the things that are going well, which areas need attention, and the most important conversations you should be having around money.

Timothy Iseler, CFP®

Founder & Lead Advisor

Iseler Financial, LLC | Durham NC | (919) 666-7604

Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.