This Is the Most Important Thing to Do in Case of a Recession

Make sure your finances are recession-ready.

It's an open question whether the United States is currently in a recession. Traditionally, recessions were often defined as two quarters of negative gross domestic product. And based on this definition, the country entered a recession this past summer.

However, the National Bureau of Economic Research (NBER), which defines U.S. business cycles, has not yet declared a recession, in part because of low unemployment numbers.

Even if the country is not currently in a recession, there is reason to believe we will be soon. The majority of CEOs are concerned one is coming. And the former U.S. Treasury Secretary under the Clinton Administration agrees.

Recessions are usually bad news for people's finances. So, what can you do in order to make sure you're ready for an economic downturn?

Do this now so your finances are recession-ready

If you want to make sure you are ready in case of a recession, there's one key step you need to take: You need to increase your emergency fund. While most experts traditionally recommended you have around three to six months of living expenses saved up, you may want to up this amount so you have as much as eight to 12 months' worth set aside.

Having more money saved can be invaluable during a recession because there’s a higher chance you’ll need to rely on it.

You see, companies often lay off workers during a recession, and it can be harder to find a job during tough economic times. If your job is eliminated and it takes a long time to find another one, having a hefty emergency fund could be crucial to keeping the bills paid and avoiding credit card debt.

Plus, during a typical recession, the stock market also sees declines. If the value of your investments falls, you don't want to be forced to sell before an inevitable recovery happens. By doing so, you would get stuck locking in losses that you could have recovered from if you'd waited longer.

A larger emergency fund will help you avoid having to sell investments to cover living costs. You can leave your investments alone until economic conditions improve and rely on your emergency savings for anything you may need to pay for in the short-term.

How to bulk up your emergency fund

Saving up a bigger emergency fund may seem challenging, but it's absolutely worth doing so you can be prepared for a recession.

The best thing to do to increase the amount you're putting in your savings account is to look for ways to cut costs. You can do this by going through your budget to identify areas to reduce spending. Remember, this doesn't have to be a permanent reduction. If you can sacrifice a little bit more over the coming weeks and months, you can help make sure you're in good shape for an economic downturn.

If you don't already have a budget, making and living on one could make a huge difference in how much you are able to put aside for a rainy day.

The good news is, the economy goes in cycles, so we will recover from a recession. But having your emergency money available can help ensure that the downturn doesn't have a lasting negative effect on your financial life.