7 Financial Do’s and Don’ts to Follow During a Recession

Women sharing tips on saving during a recession, looking at plans

The thought of a looming recession can understandably make you feel uneasy about your finances. During a recession, employers pull back on their investments in new and existing employees, consumer demand is typically down and the cost of living can increase. These factors and more can affect your ability to earn an income and cause your expenses to rise.

Fortunately, you can do things—and avoid things—to help survive a recession. Here are seven do's and don'ts of saving during a recession.

1. Do: Keep Investing for Retirement

It might be tempting to stop setting aside money for retirement amid a recession. However, try to keep investing for retirement so you don't miss out on tax advantages available with certain retirement accounts. For instance, contributions to a traditional IRA are tax-deductible, and contributions to an employer-sponsored 401(k) aren't included in your taxable income.

Furthermore, if you halt contributions to a 401(k), you might miss out on your employer's matching contributions. On top of that, cutting off deposits into retirement accounts means the growth rate of your accounts will slow, perhaps triggering a longer timeline for achieving your retirement goals.

It's also worth noting that if prices of stocks, mutual funds, exchange-traded funds and other investment products slump during a recession, it could present a buying opportunity.

2. Don't: Panic Sell Assets

When the economy takes a tumble into recession, some nervous folks sell assets—namely stocks and other investments. A mistake like this could be a costly one. Selling your investments locks in your losses, something you could have otherwise avoided by holding on.

Investment firm Morgan Stanley notes that an investor who stuck with the stock market through the various recessions that occurred from 1980 to February 2022 would have racked up a 12% annual return. Meanwhile, someone who began investing at the same time but dumped investments after downturns and remained on the sidelines until two consecutive years of positive returns would have realized an average annual return of 10%.

Let's look at how those two strategies would have affected an investor who invested $5,000 per year. The investor who stayed the course during that period would have wound up with $4.3 million, according to Morgan Stanley. By contrast, the investor who sold investments during that time and sat out the stock market for a while would have ended up with $2.5 million.

Trying to time the market can have negative consequences for your portfolio. Instead, try to think long-term with investing and ride out the short-term ups and downs.

3. Do: Keep Your Savings Liquid

As you're trying to make it through a recession, you ideally should keep your savings liquid (aside from the money you've got stashed in retirement accounts).

When your savings are liquid—kept in a savings account or money market account, for example—you've got easy access to cash in case you need it right away. But if you own a non-liquid asset like real estate, a car or jewelry, it typically takes longer to convert that asset into cash. In addition, if you price a non-liquid asset below its value to gain fast cash, you'll lose money on the deal.

Keeping your savings liquid during a recession can be particularly critical if your employer lays you off. As of February 2022, only 27% of U.S. households could cover expenses for more than six months by borrowing money or dipping into savings after losing their main source of income, according to a study from the Consumer Financial Protection Bureau (CFPB). Meanwhile, 21% indicated they'd be able to squeak by for less than two weeks.

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4. Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand.

Chances are your highest-interest debt is credit card debt. Taking as big a bite out of that debt as possible frees up money that you can put toward basic needs during a recession. The CFPB estimates that from 2018 to 2020, each U.S. household shelled out an average of about $1,000 in credit card interest and fees.

In the midst of a recession, use some restraint when it comes to piling up more high-interest debt. If need be, put your credit cards aside for the time being and stick to paying for things with cash—and focus on getting rid of high-interest debt.

5. Do: Reduce Spending

Curtailing your spending during a recession can also put your finances in a better position. But where do you start?

Data released in 2022 by the Bank of America Institute suggests that during recessions, U.S. households zero in on trimming these items from their budgets:

  • Furniture
  • Travel
  • Dining out

Other non-essential purchases to consider freezing during a recession include:

  • Subscriptions (such as streaming services)
  • Clothing
  • Delivered meals
  • Entertainment
  • Gifts
  • Elective medical procedures

To help put your spending on a diet, consider coming up with a budget. This could be as simple as writing down income and expenses on a piece of paper, or adopting a more sophisticated method such as a spreadsheet or a budgeting app.

6. Don't: Make Big Purchases

Conserving money during a recession often translates into delaying purchases of big-ticket items. Questions you might ask yourself about purchases you're pondering include:

  • Do I really need a new car, or can I get more mileage out of the car I'm driving now?
  • Will it really make a difference if I watch my favorite shows on my 45-inch TV rather than upgrading to a 75-inch TV?
  • Can my washer and dryer churn through a few hundred more loads of laundry?
  • Can I put off buying a house and continue renting an apartment?
  • Can my mattress support me through a few hundred more nights?
  • Will my current laptop computer get the job done for now?

7. Do: Build Your Emergency Fund

There's no better time than a recession to ensure you have enough money put away in case you experience a job loss, an unexpected hospital stay or a huge car repair bill.

A 2022 survey from the Achieve Center for Consumer Insight found that more than half of the adults questioned had less than $1,000 in an emergency fund, including 28% who said they had no emergency savings at all. Worse yet, two-thirds of those surveyed said they were living paycheck to paycheck.

Perhaps more alarming: Although far more people said they'd decrease spending on dining out, entertainment and vacations if they had to cover a surprise expense or an employment or income disruption, others said they'd cut back on essential expenses such as:

  • Groceries: 31%
  • Credit card payments: 14%
  • Health care: 9%
  • Retirement savings: 8%

During a recession, an emergency fund can be a financial lifesaver. Experts generally recommend that an emergency fund contain enough money to cover three to six months of living expenses.

Riding Out a Recession

A recession can be a scary time, particularly when you're on edge about whether you'll hang onto your job. But you can do (and not do) a number of things to ease your worries and shore up your finances. This includes lowering the amount of high-interest credit card debt you're carrying. One way to accomplish that is by obtaining a balance transfer credit card that offers a low or even 0% APR (annual percentage rate) for an introductory period like 12 or 15 months.