Please ensure Javascript is enabled for purposes of website accessibility

4 Ways to Recession-Proof Your Finances

By Christy Bieber - Updated Feb 26, 2020 at 9:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't get caught unprepared for a financial downturn.

Many financial experts believe a recession is coming soon. While it's impossible to predict when or if an economic downturn will hit, it's certain that one will arrive eventually since every economy goes through boom and bust cycles. 

Since no one knows when the economy will go south, the best thing to do is to always be prepared. To help you make sure your personal finances stay stable even if the economy doesn't, here are four tasks you may want to undertake. 

Older couple using calculator and looking at financial paperwork.

Image source: Getty Images.

1. Diversify your portfolio

When the economy performs poorly, it's inevitable that some stocks will go down. if you're too heavily invested in a particular company or even a particular market sector, you could see your portfolio value take a huge tumble during tough economic times. 

But if you have a diverse mix of assets, chances are good some of your investments won't do as poorly during a recession -- and some might even increase in value. You also want to have at least some of your money in safer investments than stocks.

The right mix of different kinds of investments can depend on your age and your risk tolerance. One shortcut to determine the amount of your portfolio that should be in stocks is to subtract your age from 110. This will give you the percentage to put into the market.

Once you've done this calculation, choose an appropriate mix of investments. Our model portfolios can help you easily build a diversified portfolio of ETFs if choosing individual companies is too complicated. 

2. Have an emergency fund

Recessions can sometimes result in job losses. You don't want to be unprepared if you're left without income, so aim to build an emergency fund with enough to cover three to six months of living expenses. If you find yourself without a steady paycheck, this money can supplement your unemployment benefits and buy you time to find work.

3. Avoid debt

Debt can make it harder for you to pay the bills if you do lose your job since some of your money will have to go to creditors. Recessions also often lead to a tighter credit market, which could make it more difficult to refinance your debt if you need to. 

If you steer clear of high-interest consumer debt, such as credit cards, and you keep mortgage and car loan balances as low as possible, you shouldn't have to worry as much about how you'll cover what you owe your creditors if you find your income reduced by a recession. 

4. Develop multiple income streams

A cut to your salary can cause big problems, but you can reduce the risk by developing multiple sources of income. Extra income could come from a side gig or freelance work or from investments such as income-producing stocks or real estate. If you have money coming in from different sources, the loss of one job won't be as big a problem. 

Your finances can withstand an economic downturn if you're prepared

A recession doesn't have to wreak havoc on your finances if you have the right mix of assets, low debt levels, and ways for income to keep flowing even if your primary employer has to downsize. The sooner you take steps to recession-proof your finances, the better -- the next downturn could be right around the corner! 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.