Nervous about a recession? Here's my best advice
I've done more interviews than I can count about this topic in recent weeks, and my message has been simple and consistent
Hi there, my friend.
Nearly half of Americans believe an economic recession is coming in the next six months, according to a report I wrote for LendingTree. Worse yet, that same report found that 59% of Americans feel that they’re not financially prepared today to face a recession.
That’s a scary situation to find yourself in, right? If you’re feeling that way, please know that you are not alone. You’re actually in the majority in America right now.
I can’t even tell you how many interviews I’ve done on this topic this year, and the single most common question I’m asked is this: What should people do right now?
I’ll get to that shortly, but first, I want to be clear about a few things…
What exactly is a recession? There are technical definitions of what a recession is — here’s a good explainer from CNBC — but at a basic level, a recession is a prolonged economic downturn. It can include things like higher unemployment, less consumer spending and falling stock prices but, like snowflakes, no two recessions are exactly alike.
Recessions happen pretty regularly. To quote my LendingTree report, “A recession is almost certainly coming someday… We’ve had six since 1980 — an average of every seven to eight years — with the last in 2020, so it would be almost silly to think we’ll never have another.” They can vary pretty widely in length and severity, but they do happen. However, it is also important to understand that they don’t last forever.
Most people don’t know about or care about the technical definition of a recession, but they can tell when things aren’t quite right. That’s what our survey is really indicating. Most people think that tough financial times are coming soon — and that they’re not prepared for them.
So what should I do?
When you don’t know what’s ahead, it can be paralyzing. That’s where many people find themselves today — unsure of their next steps and nervous to do the wrong thing.
As I said, I’ve been asked countless times what people should do today, and my message has been simple and consistent.
Control what you can control.
You have no idea what your employer is going to do. You have no idea if the stock market will go up or down. You have no idea what’s going to happen with tariffs. You have no idea if the Federal Reserve is going to make interest rates go down anytime soon. You have no idea how high prices will rise or for how long. You have no idea if you and your loved ones’ health will stay strong. You have no idea if your car will break down or your sweet puppy will need an emergency vet visit.
You can, however, make sure that you’re as ready as possible for whatever might be ahead. You do that, in part, by making your financial foundation as stable as possible by focusing on what you can control.
Here are some key moves to make…
Building your emergency savings. Don’t get hung up on advice saying that you need to save three to six months’ worth of expenses in an emergency fund. (“I’m never in a million years going to be able to save that much, so why even bother starting?”) What matters most is getting started, even with a few dollars from each paycheck, and then getting in the habit of saving. If you do that, your emergency fund will grow. If your fund is in a high-yield savings account (here’s a list of them from LendingTree sister site, DepositAcccounts.com), it’ll grow even faster. Either way, having that savings set aside makes you better financially prepared to handle whatever may come. And yes, even if you have high-interest debt, you should still build your savings while paying that debt down. That’s because if you have savings when you eventually pay off your card debt, it’ll mean that when a big, unexpected expense comes, you may be able to pay for it with cash instead of just whipping out the plastic again.
Lower your interest rates. Interest rates on everything from mortgages and auto loans to credit cards and personal loans are super-high right now, and that’s not likely to change anytime soon. However, you can lower interest rates yourself, if you’re willing to take action. A 0% balance transfer credit card can dramatically lower the amount of interest you pay over the life of that balance, as can a low-interest personal loan. An accredited nonprofit credit counselor (such as the National Foundation For Credit Counseling) can help you negotiate with creditors. And you can even call your credit card issuer and just ask them for a lower rate. It works more often than you’d believe. (I wrote about this in my book, “Ask Questions, Save Money, Make More: How To Take Control Of Your Financial Life,” including word-for-word scripts on how to ask.)
Reassess your budget and ruthlessly prioritize. A budget isn’t just a spreadsheet. It should be a living, breathing representation of your priorities. What you spend on says a lot about what you value, so taking the time to review what you’re spending on and asking yourself if it fits with your priorities is definitely a worthwhile exercise. That’s especially true during uncertain financial times. For many of us, a review of our expenses will uncover ways to free up extra dollars to put toward building an emergency fund, paying down high-interest debt or working toward other goals.
Maybe hold off on non-essential big-ticket purchases for just a minute. If your car breaks down and you have no way to get to work, buy another car. If your washing machine, refrigerator or air conditioning unit dies, replace it if you need to. However, if you have big-ticket items that don’t need to be bought today, consider putting off the purchase — just for a little while — and putting that money instead in an emergency fund or toward paying down credit card debt. Again, you don’t have to put these items on hold forever, but holding off for a short time to help provide yourself a little more wiggle room financially can make a lot of sense.
Keep building your credit score. There’s little in life that is more expensive than crummy credit, so make sure you’re doing what you can to improve and protect your score. For example, you can set up automatic payments for all of your credit cards to make sure that they’re paid on time every single time. (On-time payments are the single most important factor in credit scoring formulas.) Also, it is a good idea to check your credit reports from the three major credit bureaus (Experian, TransUnion and Equifax) at AnnualCreditReport.com, the federal-government-mandated, no-strings-attached website where you can download a free copy of your report from each bureau once a week. Why check these reports? Because many Americans’ credit reports contain inaccuracies that could negatively impact their credit score, such as saying that you paid late on an account when you actually didn’t, and the best way to discover those mistakes is to review the report yourself.
What are you doing to protect yourself? Or are you just not worried at all? Let me know in the comments below.
Thanks!
Matt