5 Money Moves for Your Recession Game Plan

In the past 75 years, recessions on average have occurred every six years and lasted about 10 months (1).  The last recession — two months in 2020 — was the shortest on record.

There’s no guarantee that the economy will slip into a recession, but the uncertainty is growing. One certainty is that a recession will come at some point. Contractions are one stage of the economic cycle. 

So, whether a recession appears sooner or later, being prepared is always a prudent financial planning strategy. Consider making these five moves to help get you ready.

1. Build emergency savings

An emergency fund is the foundation of any financial plan and becomes even more critical during an economic downturn. It can prevent you from resorting to credit cards or borrowing from a retirement account to pay bills after a job loss or to cover a major unplanned expense. 

Still, many consumers don’t have emergency savings. Nearly one-third of consumers surveyed by the Federal Reserve in 2021 didn’t have money on hand to cover a $400 emergency (2). 

So how much emergency savings do you need? To find your number, start by adding up your essential monthly living expenses, such as food, utilities, housing, transportation and health insurance. Don’t forget to factor in necessities that you pay less frequently, like auto or homeowners’ insurance.

The standard recommendation is to set aside three to six months’ worth of living expenses for emergencies. But job security and dependable household income can also determine your savings target. For example, a dual-income couple with secure employment might require only three months’ worth of expenses. A sole wage earner working in a sector that’s sensitive to swings in the economy may need enough to cover bills for six months to a year. 

Keep the savings in a separate interest-bearing account that you can easily access in an emergency. It can take some time to reach your savings target, but even setting aside $75 from each weekly paycheck will amount to $7,800 in two years. 

2. Reassess your budget — or create one

A regular budget review is always a good idea, but it’s also key to keeping your finances on track during a recession. You might find that recent inflation has thrown off budget assumptions you made a year ago and now need adjusting. Or a review may reveal where to trim spending if your income drops or you want to boost savings. 

But if you’re like many consumers and don’t have a formal budget, it’s a good time to establish one. A popular guideline for budgeting take home pay is the 50-30-20 rule: 

• 50% is earmarked for necessities, such as housing, utilities and groceries
• 30% for savings and debt payments
• 20% for discretionary purchases, like travel, hobbies and entertainment

If you must cut expenses, look first to reducing discretionary spending by, say, canceling streaming services you rarely watch or dining out less. Then double-check what you’re paying for necessities. For instance, if you’ve been with the same auto insurer or years, you could save hundreds of dollars a year by reshopping your policy. In fact, insurers in some states even charge higher rates for customers who are unlikely to shop around.  

3. Pay down credit card debt 

Feeling a squeeze from inflation, Americans have been racking up credit card debt. Texans, for example, carry an average of $6,194 of debt on credit cards, according to a 2022 study by credit reporting company Experian (3). But this debt is becoming more expensive as the Federal Reserve continues raising a key interest rate to tame inflation — a move that influences rates on credit cards and other consumer financial products.

The average credit card interest rate soared to 20.18% in early February 2023, or about 4 percentage points higher than a year earlier, according to CreditCards.com (4). At that rate, Texans with $6,194 in card debt will pay about $103 a month in interest — money that could go towards other goals.

If you carry a balance month to month, develop a plan to eliminate it before interest rates tick up further. One strategy that saves on interest is to put extra dollars toward the card with the highest interest rate first, while maintaining the minimum payment on the others. Once that first card is paid off, you tackle the card with the next highest rate. You continue until the last card is paid off. 

Another option is to transfer your balance on a high-rate card to another card offering a 0% introductory rate for a period. You usually must pay a transfer fee, but it can be worth it if your current rate and balance are steep. Use the months you won’t owe interest to reduce your balance more quickly. Just make sure not to add to the debt and to pay off the card before the 0% rate expires and the new rate kicks in. 

4. Maintain a healthy credit score

You might have no plans to seek a loan or other line of credit now, but a recession might change that. And your credit score — a gauge of the likelihood you’ll repay lenders — is one factor that determines whether your application for a personal loan, mortgage or credit card is approved and under what terms. 

There is a variety of scores available; some free and others you can buy. Scores typically run from 300 to 850; the higher the number the better. Here’s how the widely used FICO Score rates creditworthiness based on a score:

• Below 580 — Poor
• 580 to 669 — Fair
• 670 to 739 — Good
• 740 to 799 — Very good
• 800 or higher — Exceptional

You don’t need an exceptional score to get the lowest rate on borrowing. According to FICO, a score of 720 can qualify you for the same attractive rate on an auto loan as a borrower with a perfect 850 (5). 

Scores are derived from information in credit reports. At FICO, 35% of your score is based on your payment history and 30% comes from the amount of credit you use. So, if you need to improve your score, make sure to pay bills on time and aim to use no more than 30% of your available credit. For example, if your combined credit limit is $10,000 on credit cards, keep your total balance at $3,000 or less.

And review your reports from the three major credit reporting companies — Equifax, Experian and TransUnion — to check if there are any errors that can drag down your score. You can get free weekly reports from all three through 2023 at www.AnnualCreditReport.com.

5. Keep retirement savings on track

It may be tempting to cut back on saving for retirement given today’s economy and volatile markets. In fact, nearly one-third of employees reported that they reduced their contributions to their 401(k) (6).

Stocks tend to drop prior to a recession, but they usually rebound before the recession ends. So, if you decide to sit on the sidelines until the market gyrations settle, you could miss out on some of the best days of a rebound.

Plus, there are financial benefits to continue building a retirement nest egg. Contributing pre-tax dollars to a 401(k) or similar account lowers your current taxable income. And if your employer matches your contributions, that’s free money. 

By regularly investing in your retirement plan no matter what’s happening in the markets, you’re practicing “dollar-cost-averaging.” You’ll end up buying more shares when stocks are cheap and fewer when prices are high. This can make it easier to stay the course during a recession. 

And if your finances permit, consider increasing your contributions. The IRS raised contribution limits for 2023. Workers can now sock away up to $22,500 in a 401(k), 457 or 403(b) plan, plus an extra $7,500 if they’re 50 or older. 

(1) US Business Cycle Expansions and Contractions, National Bureau of Economic Research, 2021.  
(2) Economic Well-Being of U.S. Households, Federal Reserve, May 2022.
(3) Here’s How Credit Card Debt Varies By State, Experian, August 2022.
(4) Average credit card interest rates: Week of February 1, 2023, CreditCards.com, Feb. 1, 2023.
(5) Loan Savings Calculator, myFICO, February 2023.
(6) State of the Workplace Financial Benefits Study, Morgan Stanley at Work, September 2022. 

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Texas Capital Bank.