4 Ways to Prepare for a Recession in 2023

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  • Many business leaders and economists warn a recession could be in the cards, so it's worth taking steps to protect your finances.
  • Look at your income, expenses, and cash on hand and imagine how you'd cope if you lost your job.
  • Try to build up your emergency fund and pay down debt, as both can make a big difference in a recession.

If you're worried about a recession, these moves could help you sleep easier at night.

There've been so many recession warnings in recent months that it has started to feel as if Chicken Little is telling us the sky is going to fall. All the same, there is a very good chance that the U.S. will enter a recession next year, so it's worth doing what you can to prepare. Especially since any steps you might take will stand you in good stead whether or not one comes along.

Here are some steps you can take to recession-proof your finances.

1. Take stock of your financial situation

Many people find the idea of making a budget scary, especially if it might also mean some lifestyle changes. I can totally understand the fear. For a lot of my twenties, I had only a vague idea where my money went. But changing the way you see budgeting can make a huge difference to your bank account balance.

Far from being a boogeyman, a budget can be a guiding light that helps you navigate difficult economic waters. Start by working out your monthly income and expenses. You can do this by scanning through recent bank statements or using a budgeting app. Think about bills that you pay annually or quarterly as well.

Once you've got an idea of your financial situation, ask yourself the following questions:

  • What's the gap between your income and your expenses? This may be money you can put toward your emergency fund or debt repayments. If you're on top of both, you might invest that money for the future. If the gap is very small or you spend more than you earn, look for ways to reduce your costs or increase your earnings.
  • If you were to lose your job tomorrow, how would you cope? Think about how much money you have on hand to tide you over and plan out what non-essential spending you'd cut if you got laid off. When bad things happen, we often panic, so it helps to work out what steps you'd need to take beforehand.

2. Prioritize your emergency fund

Many financial experts recommend having an emergency fund with three to six month's worth of living expenses. With a potential recession on the horizon, some -- like Suze Orman -- suggest socking away even more. If you lose your job or get hit by another financial crisis, that money will mean you can cover your essential living costs without having to take on debt or sell your investments.

Keep your emergency fund in a separate savings account that's easily accessible, so it doesn't get mixed up with the rest of your money. Use the estimation of monthly expenses you made above to get an idea of how much you'd need and think about other ways you might keep your head above water in an emergency.

3. Pay down high interest debt

If you carry high interest debt, particularly that of the credit card variety, look for ways to pay it down. The more you can pay off, the better positioned you will be to handle any economic difficulties. One big benefit is that you'll free up some of your monthly budget, as you won't have to make any debt payments. That will make life easier if your income suddenly drops.

Another thing to bear in mind is that interest rates are climbing, making it more costly to carry debt. Plus, it's often harder to borrow money in a recession. If you can reduce your credit card debt now, you'll have leeway to borrow again if things get tough. Another side benefit is that you may also improve your credit score. Paying down credit card debt can improve your credit utilization ratio, which is a key factor in calculating your score.

4. Take steps to recession-proof your career

We've touched on some of the big financial steps to take, but what about your career? A lot depends on what you want and what stage of life you are at. As with your finances, try to take stock and make a plan now so you know what to do if you do lose your job. If you've been thinking about switching jobs, what qualifications might you need to make the jump, and how can you go about getting them?

If you like your current job and career, are there moves you can make today to improve your standing at work? Perhaps you can volunteer for additional responsibilities or learn skills that will help you stand out. There are no guarantees, but positioning yourself as a positive and adaptable colleague never does any harm.

It's also a good idea to update your resume and reach out to your professional network. It's often easier to be specific about your skills and achievements when you have a job than when you're sitting at home worried about your next steps.

Preparing for a recession is easier said than done

Unfortunately, knowing how to prepare for an economic downturn doesn't necessarily make it easy to do. Soaring living costs have made it particularly difficult to save money and pay down debt in recent months. Indeed, some families have had to dip into their savings or take on debt to cover essential costs.

Try to set yourself achievable goals in terms of savings and debt pay off. We don't know for sure when a recession will hit, nor how serious it will be. But every dollar you can put aside now will ease any economic pain you suffer if things do take a turn for the worse.

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