Financial Fundamentals Blog

Are We in a Recession? 5 Tips to Secure Your Finances


Everyone has experienced inflation recently, whether it’s the rising price of food at the grocery store, an uptick in the cost of utilities, or higher premiums for other goods and services. Because of rising inflation rates, many are worried that the economy is headed toward a recession. 


These worries spark questions such as, “What is a recession?” and “Are we in a recession?” Most importantly, rising inflation rates make people wonder, “How can I prepare for a recession?” 


A recession is a large decline in economic activity that affects the gross domestic product (the value of all goods and services produced in a country), employment, income, production, and retail sales. According to the National Bureau of Economic Research, recessions have historically lasted between 10 and 17 months, with the shortest recession lasting just three months in 2020. 


Although recessions are generally short, they can be frightening times for consumers who bear most of the negative impacts. Here’s the good news: There are ways to prepare your finances in case there's a recession.


How to Secure Your Finances in a Recession

Making sure you’re prepared for unforeseen circumstances is important, especially in times of inflation and recession. Ways you can prepare for a recession include:


1. Avoid unnecessary expenses.

Look at your monthly expenses and evaluate what’s essential. Some excess expenses that can be reduced or cut altogether include streaming entertainment services and takeout or eating dinner out. 


For example, one dinner out may cost more than $50 for two people. If you multiply that by the number of times you get dinner out each month — especially if you have children that go with you — you’ll find a lot of excess spending. If you don’t want to completely cut dinners out, it may help to reduce the number to one a month. This can also make dining out feel like a more special occasion. 


The money saved from reducing or cutting these excess expenses can then be put into savings or an emergency fund.


2. Create an emergency fund.

An emergency fund should be separate from your general savings because you should only dip into this type of fund in extreme circumstances. An emergency fund is a worst-case scenario fund for job losses, medical expenses, or any other unforeseen financial strains that come up. Ideally, you should aim to have enough emergency funds to cover 3-6 months’ worth of expenses. 


To add to the emergency fund, look at the amount marked for your monthly necessities. After determining that amount and what is in your leftover income each month, determine a reasonable amount to set aside in your general savings and emergency fund.


3. Pay off your debts.

Paying off your debts will help you get extra breathing room in your budget and provide a bit more peace of mind in case of job loss. When inflation rates rise, interest rates also rise. This is a way the Federal Reserve works to keep the economy healthy. If you have a student loan or credit card with a variable interest rate, it may be beneficial to focus on paying off that debt first. 


With interest rates and inflation rising, if you are considering a personal loan or a balance transfer credit card, you may want to decide sooner rather than later. However, it’s important to note that you should avoid using the credit card once the balance is transferred or paid off with a personal loan. The debt can feel insurmountable if you now have a personal loan or new credit card and a growing balance on the credit card you just paid off. 


4. Avoid living beyond your means.

With inflation rising and economic recession, it may be time to adjust your lifestyle and control spending. Living within your means involves spending less than your income each month and putting money into other goals, such as a savings account or emergency fund. 


Setting or reevaluating your budget is an essential first step toward living within your means. Knowing what your budget is will help you have awareness of your spending habits, allowing you to see where your excess spending is and reduce it.


5. Have an additional source of income.

First, keep your resume updated, even if you’re happy with your current job, to make sure you’re prepared in case of job loss due to unexpected shifts in the economy. Even if you have a full-time job, it may be a good idea to look for an additional source of income on the side, such as a part-time job or consulting work. This will help provide financial security in case you lose one source of income.


Make Secure Financial Decisions

Ensuring you’re making smart, secure financial decisions is important, especially during times of inflation and recession. To support our members’ long-term financial health, we’ve partnered with KOFE (Knowledge of Financial Education) to offer free financial education tools and materials

Interested in consolidating your credit cards or personal loans into fewer payments to address your debts? Check out our debt consolidation calculator to find out what your ideal rate and payment would be.