14 Ways to Financially Navigate a Recession

Thanks to COVID-19, the economy is officially in a recession. These periods of economic decline are normal, but they can have a negative impact on your finances if you aren't prepared for them.

The good news is a recession doesn't have to leave you in a worse position when it comes to your money. You just need to take the right steps to navigate it. Here are 14 of them.

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An emergency fund can single-handedly save you from financial devastation during a recession.

Money earmarked for emergencies in an accessible savings account can help you cope with a cut to income, surprise expenses, or other economic calamities.

Aim to have at least enough to cover between three and six months of living expenses, and opt for a fund on the larger side if your job is especially uncertain.

If you aren't already living on a budget, now is the time to make one. A budget helps ensure your money is used wisely rather than wasted. When the country is facing tough economic times, it's more important than ever to make every dollar count.

There are different wages to budget, including an 80-20 budget or a detailed one that allocates every dollar. Decide which works for you, make your budget, and track your spending to ensure you're sticking to it.

ALSO READ: 3 Things Budgeting All-Stars Do

Most people have things they splurge on, and that's not a problem when the economy is growing and unemployment is low. But in today's economic climate, it makes sense to seriously cut back on discretionary spending so you can shore up your financial situation.

Tracking what you're currently spending money on is a good way to find areas where you're going overboard and can reduce your expenditures. There are apps that simplify the process of tracking spending, but manually writing down each purchase may work better, as this will make you more conscious about where your money is going.

Being in debt not only means you have a monthly bill to pay but also reduces the amount of cash available to you because some of your hard-earned income is ending up in the pocket of your creditors.

When you make your budget and seek out spending cuts, consider using some of the money saved to pay down your debt. Prioritize high-interest loans first and make extra payments whenever possible. That way you can become debt-free faster and won't have to worry about these obligations if you face a job loss or income cut.

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If you're having a hard time covering the basics during a recession, you may be tempted to borrow. But by doing so, you're digging a hole you just have to get out of later -- and making everything you buy more expensive to boot.

Instead, aim to do everything you can to avoid using credit to get by. This may mean drastic budget cuts or picking up a side gig, depending on your situation.

ALSO READ: 50 Side Hustles You Can Still Do

The biggest risk of a recession, for most people, is the possibility of a job loss. But you can reduce the chances of that happening by making yourself invaluable to your employer.

Work on developing new business skills, take on extra projects at work, and make sure to show you're dependable -- especially if COVID-19 has you working from home.

Sometimes, despite your best efforts and through no fault of your own, you'll end up facing a job loss in a recession. It can be hard to find new work when unemployment is high, so make sure you're ready to spring into action if this happens to you.

That means updating your resume if you haven't in a while, maintaining your LinkedIn network, joining and becoming active in industry groups, and keeping up your professional connections even if you can't attend in-person events due to the coronavirus threat.

Another big risk of a recession is that it will leave you falling behind on important goals, such as retirement savings. To avoid this fate, continue making contributions to your 401(k) and other investment accounts if at all possible.

Even if you do lose your job and your access to a workplace plan, you can still invest in an IRA and score tax savings. Treat your retirement investing as a priority after other essential bills are paid, diverting some of your discretionary money toward investing for your future if you can afford to.

And if you're in a good position financially now, you may want to actually increase the amount you invest, as recessions tend to present buying opportunities.

ALSO READ: 5 Secrets to Successful Retirement Investing

While you don't want to stop investing during a recession, you do want to make sure you are investing responsibly -- which means you aren't overexposed to stocks.

While it's tempting to let your portfolio become unbalanced during good times, a recession is no time to have the wrong asset allocation. So make sure you know what percent of your portfolio you want in the market, and if your portfolio doesn't line up with your goals and risk tolerance, make a change.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The market tends to be turbulent during a recession, so you'll want to make sure you have an investing strategy you're confident can see you through tough times.

For most people, buying and holding stocks is the best approach, as it's much harder to be successful at short-term trading. Dollar cost averaging is also a good approach to help you avoid potential pitfalls associated with trying to time the market.

These investment strategies may not be ones that you adopt, but whatever you decide, make sure you have a good plan for where to put your investment dollars and are confident your investments can weather a recession.

If you're short of cash, the money in your retirement accounts may seem like an attractive pool of funds you can tap. That's especially true now that coronavirus relief legislation has made it easier to withdraw money or borrow against these accounts.

The reality, however, is that raiding your retirement funds is almost always a bad idea. It could cause you to miss out on potential gains as well as get hit with penalties. Unless it is a dire financial emergency, just don't do it.

ALSO READ: Thinking of Taking a CARES Act Retirement Plan Withdrawal? Make Sure You Qualify

When you see your investment account balance fall, it's tempting to sell everything to avoid further losses. But if you take this action, all you've done is lock in the losses you've already experienced and miss out on any chance at recovery.

The reality is, the market will recover -- sometimes quickly -- from a crash. And if you have investments you're confident in, those usually will, too, given time. So unless your investment thesis changes, leave your money alone and try not to worry about it if you experience some losses on paper.

Sometimes, when your investments perform poorly during a recession, it presents an opportunity.

One of the best options when your portfolio is down is to convert from a traditional to a Roth retirement account. You'll be taxed on the conversion, but if your investment account balance is lower due to a market downturn, you'll have less money subject to this tax. And once the conversion is complete, you'll be able to access the funds tax-free in retirement as long as you follow a few simple rules.

If you have losing investments you no longer have confidence in but also have investment gains, tax loss harvesting may also be attractive to you.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

When you're in the midst of a recession, it's easy to imagine that troubled times will last forever. But if you instead remember this is a short period of time and tomorrow is a brighter day, it's much easier to make the sacrifices you need to avoid long-term financial damage.

Whether this means drastically cutting your budget or holding onto investments even though you're nervous about daily market moves, you'll end up a lot better off if you don't react based on temporary bad news to problems that time will solve.

ALSO READ: 4 Must-Own Recession Stocks

For most of us, this recession isn't the first we've lived through, and it won't be the last. Boon and bust cycles are a natural part of life, but if you follow these 14 tips, they won't affect your long-term financial prospects or your goals for the future.

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