6 Financial Moves to Make Before a Recession

Put simply, a recession is when the economy stops growing. A group of economists at the National Bureau of Economic Research (NBER), all experts in studying business cycles, is consulted to provide its recession evaluation.

The NBER economists define a recession as a “a significant decline in economic activity” that typically lasts “more than a few months.”¹ While there’s no definitive rule about what constitutes “significant,” a popular rule of thumb is that when the country’s gross domestic product (GDP) – the value of all the goods and services produced – falls significantly for two consecutive quarters, we’re in a recession.

According to NBER, there have been eight recessions since 1969.² The 18-month downturn from late 2007 until mid-2009, dubbed the Great Recession, is the longest recession in that period.

There can be different triggers for what causes a recession.³ The Great Recession, for example, was caused by the bursting of the housing bubble. Millions of homeowners lost their homes and/or their jobs, and the financial system destabilized. Sometimes a recession happens when consumers and businesses want to buy more goods than the amount available, causing prices to rise – also known as supply-demand imbalance. It’s important to note that inflation, the rate of price increases over a given period, isn’t the same as a recession. But when the rate of inflation spikes, it can set off a chain of events that ultimately results in a recession.

When the rate of inflation runs too “hot,” the Federal Reserve typically gets concerned and raises its Federal Funds Rate – a key short-term interest rate in the U.S. economy. This action makes borrowing more expensive and can, therefore, help slow down the rate of inflation. But if the Fed raises its rate too much/too fast, businesses and consumers can slow down borrowing enough to trigger a recession.

Now that you understand how and why recessions happen, it’s time to build up your recession defenses. We never know exactly when a recession will hit, but remember: It’s a matter of when, not if. Taking the following six steps today can help you build permanent recession defenses (and peace of mind) into your financial plan:

It’s always the right time to consider ways to reduce your spending, but it’s especially smart if you’re looking for ways to save more to prep for a future recession. Every dollar you can cut from spending today is a dollar that becomes available for emergency savings, or for paying down debt – more on that later.

Take a spin through your monthly credit card and bank statements. Look for any recurring charges you might be able to trim or eliminate. For example, are there any subscriptions you can cancel? It’s also smart to look for ways to pare your spending on essentials. A rewards credit card that offers cash back or points for gas or grocery purchases can help you save some money on living expenses each month.

Removing or reducing this monthly cash drain can be a financial lifesaver if your income takes a hit in a recession. And keep in mind that some recessions are caused by interest rates rising too high, too fast. That might mean the APR on your credit card could increase in the months before a recession – this might be more motivation to tackle an unpaid balance that’s carrying a high APR.

If you need to use a card for new purchases and anticipate you might not be able to pay the bill in full each month, consider opening a new card that offers a 0% intro APR. This can be a cost-effective way to pay for necessary big-ticket purchases over time, as long as you pay off the balance in full before the introductory period ends. Or, if you have a card with an unpaid balance and high APR, look into whether you can transfer the balance to a new card that has a 0% intro APR offer – especially if it doesn’t charge a fee for the balance transfer.

Being a “rock star” at work is sound advice in any economic climate, but it’s especially important in a recession. Since employers are typically motivated to keep the workers they value most, aim to be the last person they consider laying off. And don’t slack off on keeping your skills sparkling and your networking humming. Both can prove valuable in the face of potential layoffs.

Some extra income today can help you build your emergency fund faster, or accelerate your plan to pay down high-interest debt. That side gig might also prove valuable if layoffs occur, or if your hours are reduced during a recession.