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7 Effective Ways To Prepare For a Recession

Updated: 25-10-2024, 07.01 AM

Despite cooling inflation, a growing gross domestic product (GDP) and low unemployment levels, some still worry that America could face a recession in 2025. If you’re concerned that an economic downturn could hurt your finances, learning to better manage your money and build a safety net now is crucial.

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Dave Ramsey, famed personal finance expert, radio host and author, is known for his advice on breaking free from debt and establishing good money habits. He offered these seven recession preparation tips you should consider.

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Just hearing about a potential recession may leave you feeling very anxious — or even cause you to make unwise money moves.

Ramsey’s suggestion is to remember that you’re always in control of your finances, even if the economy isn’t in good shape. By keeping a calm and clear mind, you can focus on improving your financial situation now so you can ride out a recession more easily.

Before you make additional money moves, you should know where your finances currently stand. Ramsey recommends identifying all your assets, debts and monthly bills so that you have the information readily available. By knowing how much you’ve saved, what you owe and what you must pay each month, you’ll know where your finances need improvement.

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Even when a recession isn’t occurring, your finances can easily get out of control if you lack a budget. You need one that lists all your monthly income and expenses in detail — and shows your leftover funds once you account for expenses. If you end up with a negative number, that’s a sign to find costs to cut right away.

While a simple budgeting spreadsheet can work, Ramsey recommends his free EveryDollar app since it handles the calculations. You can also get a premium version of this app with several financial planning tools. Whichever option you choose, be sure you actually follow the budget and don’t use debt to cover a cash shortage.

While an emergency fund comes in handy for any large unexpected expense, it’s especially crucial during a recession, when a job loss could occur. As part of his “7 Baby Steps,” Ramsey advises starting with a $1,000 emergency fund. Ultimately, you’ll want to have at least three to six months of expenses, but Ramsey suggests getting rid of all your debt before building a larger emergency fund.

Consider using a high-yield savings account or money market account to get the best return on your emergency funds. Note that using a certificate of deposit (CD) for this purpose can be problematic due to early withdrawal penalties.

When it comes to your investments, Ramsey reminds you to think about the long term and avoid making decisions out of fear. Seeing your portfolio’s value fall during an economic downturn can be stressful. However, you don’t want to lose money by selling investments just to put that cash elsewhere and not earn a good return.

Along with not touching your investments, Ramsey encourages buying mutual funds when prices are low since you can benefit from significant returns in a better market. But before doing that, you should achieve your savings and debt payoff goals and not have concerns about your current income.

Ramsey tweeted once: “The most important key to building wealth is becoming and remaining debt-free.” While his philosophy applies anytime, escaping debt before a recession will leave you with more money to handle potential financial strains such as falling investment values and rising prices.

He proposes following the debt snowball approach wherein you knock out your debts from the smallest to the largest. It’s motivating because you start seeing zero balances quickly, and the implementation is straightforward since you won’t need to look into details such as interest rates. Just make sure you don’t build more debt during the process.

Employment stability is a concern during a recession because companies often cut hours or lay off workers to reduce expenses. Ramsey advises you to take a look at how stable your job is and consider seeking other employment options if you have doubts. He also suggests moving from a focus on paying off debts to building your savings if you face job instability or unemployment.

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This article originally appeared on GOBankingRates.com: Dave Ramsey: 7 Effective Ways To Prepare For a Recession