Tips to build financial resilience during downturns

The United States is not in a recession, but economic cycles suggest one will come. A nationwide downturn is marked by falling consumer spending, job losses, and tighter credit. While no strategy can fully shield against these effects, building financial resilience can help avoid emotional decisions during tough times, said Sheila Walsh, a certified financial planner at Georgetown University.

Track Income and Expenses

Start by listing monthly income and expenses. Separate essential costs—like housing, food, and utilities—from discretionary spending, such as dining out or subscriptions. Knowing where money goes helps identify areas to cut back if needed, Walsh noted.

Regularly spending more than you earn can strain finances. Consider using savings or credit cards to cover gaps, but high interest rates—nearing 20% for credit cards—make debt a heavy burden. Cutting unused subscriptions or reducing discretionary spending can free up cash, she said.

Tools like credit card payoff calculators can show how switching to a lower-rate loan or balance transfer card might save money. Reviewing credit reports for errors also helps improve scores, which can lead to better loan terms when needed.

Emergency Funds and Debt

Experts recommend saving three to six months of essential expenses in a high-yield account. However, the exact amount depends on personal circumstances. For example, homeowners might use a home equity line of credit (HELOC) as a backup, though rates vary based on credit scores.

Bankrate data shows a 7.26% average variable rate for HELOCs in early May for those with a 700 FICO score. Potential costs like closing fees or minimum withdrawals should be evaluated carefully, said Stephen Kates, a Bankrate analyst.

If job loss is a concern, use employer benefits now. This includes medical care, professional courses, or discounts. Saving enough in retirement plans to get full employer matches is also crucial. Review severance policies and state unemployment benefits for planning purposes.

Retirement and Investment Strategies

Those planning to retire within five years should maximize savings now, said Nicholas Covyeau, founder of Swell Financial. If a recession hits and stocks fall, delaying retirement until the market recovers could help. In the worst case—early retirement—Covyeau recommends a six-month emergency fund and a portfolio producing five to seven years of income from fixed assets.

Investing in cash instruments like money market funds for one to three years’ worth of expenses, and bonds or CDs for the rest, ensures liquidity. This approach avoids selling stocks during downturns, which can hurt long-term savings.

Walsh emphasized the importance of preparation. “Getting clear on your money habits helps you avoid panic,” she said. Whether through budgeting, debt reduction, or retirement planning, the goal is to stay steady when economic conditions shift.