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This Could Be the 1 Thing That Gets You Through a Recession

By Maurie Backman - Mar 15, 2020 at 6:18AM

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It's time to prepare for the possibility of an extended downturn. Here's how.

As COVID-19 cases continue to spike nationwide, millions of Americans are walking around on edge with so many questions unanswered. What's the actual risk of contracting the virus? How dangerous is it? When will all of the recent stock market turbulence settle down? And will the events of the past few weeks be enough to spark a full-blown recession?

It's easy to see how the latter scenario could unfold. First of all, the stock market has taken a series of beatings. Secondly, Americans are already experiencing disruptions to daily life. Schools are closing. Stores are seeing less foot traffic. Those who aren't entitled to paid sick time are apt to lose out on wages, and once that happens, they'll start spending less, thereby kick-starting a cycle that drives the country into recession territory.

Man with sad expression sitting on couch and holding his head

IMAGE SOURCE: GETTY IMAGES.

It's not a pleasant thing to think about. But there's one very important step you can take to protect yourself in the event that a recession comes to be.

Have an emergency fund

We're told time and time again that it's important to have money in savings to pay for unplanned bills. Without cash in the bank, you may be forced to resort to debt the next time your car breaks down, your roof starts leaking, or you encounter another surprise expense.

But here's another reason you need cash reserves: You never know when a recession could strike. Once that happens, you could lose your job or see your hours cut, thereby slashing your income. And even if you have investments, cashing them out to pay your bills isn't what you want to do when the market is down, because that's when you actually take serious losses that hurt you long-term.

That's why you need an emergency fund with enough money to cover at least three months of essential living expenses, and, ideally, more like six months' worth. That way, if something happens to your income, you'll have money you can access to stay on top of your bills while you ride out the storm. Or, to put it another way, if the economy takes a drastic turn for the worse, and you don't have money in the bank, you could face a host of dire consequences ranging from loading up on debt to actually losing your home to foreclosure. And those aren't risks you should be willing to take.

Don't take chances

An emergency fund is supposed to protect you from unforeseen financial circumstances. But in this case, we may not be dealing with that. If the stock market continues to tank, and the logistical impacts of COVID-19 continue to wreak havoc on communities large and small, that could create the perfect setup for a full-blown recession that winds up lasting months. If you make an effort to build emergency savings, you'll have much less to worry about if that hypothetical becomes reality, so cut back on spending immediately, get yourself a side job, or do whatever it takes to bring your savings account balance up as quickly as possible.

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