How To Prepare For A Recession In A Perfect Storm

In the absence of reliable economic data due to the longest government shutdown in American history, hearing words like inflation, bear market, and recession bandied about in the financial news is nerve-wracking. It would be natural for you to worry about how this will affect you and your family. We’ll explain these terms and how to prepare for a recession.

Even if a recession isn’t forthcoming, it’s always a good idea to understand how macro factors may affect your finances. Recessions occur periodically and may be mild and short-lived, as in 2020, or moderate to severe, as in the Great Recession, which lasted 18 months. While we typically don’t know if and when a recession will come, keeping your finances in good order and having liquidity is the best preparation, always, and reduces stress about the unknowable. You can control your household economy, not the macroenvironment.

 How is Our Economy Doing?

Inflation is Still Above Target

Inflation is a steady rise in the prices of goods and services purchased for consumption by urban households, measured monthly by the consumer price index (CPI). The last CPI report was released by the Bureau of Labor Statistics, albeit with a short delay. For September 2025, the report showed that the CPI rose 3.0 percent over the last 12 months, not seasonally adjusted. Although there have been signs that the government shutdown may end soon, the October CPI report may be further delayed or even canceled, as the shutdown has halted the collection and processing of new data. Due to this data fog, Fed Chair Powell has dampened expectations for a near-term interest rate cut at their next meeting. 

Consumers are paying higher prices at the gas pump, grocery stores, and elsewhere. After years of low inflation, inflation rose in 2021 to higher levels above the target 2% rate. 

Strong Stock Market Showing Some Cracks

The stock market has been strong since 2023, benefiting from expected advances in Artificial Intelligence (AI), particularly in the tech sector, which is a harbinger of improved productivity. The S&P 500 is up over 14% year-to-date and 17.5% over the last 12 months. However, concerns have arisen about a potential bubble in the future, given the high levels of spending on AI infrastructure without significant tangible benefits to date. Many investors believe the market is due for a correction, which is defined as a short-term decline of at least 10%. The strong rise in the stock market has been unusual, and a decline in the market can bring down exorbitant valuations, especially for the Magnificent Seven or so stocks.   

  In contrast to a correction, a bear market is much more severe, with stocks drawing down at least 20% from their highs.  We have had 14 bear markets since 1947. The average length of a bear market is around 9.5 months, and they typically occur 3.5 years apart. The last bear market began in March 2020 due to the pandemic, and it lasted only a short time.

Bear markets often create buying opportunities when they clear the decks by driving valuations to low levels from which more significant gains can occur. The challenge for investors is timing the bottom, which I don’t recommend and will discuss later.

A Looming Recession? 

A recession often accompanies a bear market, but not always. A recession is a temporary economic decline marked by weaker trade, higher unemployment, and lower industrial activity, generally identified by a decline in GDP over two successive quarters. They usually last from six months to a year (averaging 11 months) and are marked by contractions across many sectors of the economy. In five of the past six recessions in the last half of the century, bear markets attended recessions 83% of the time.

The Fed has been balancing high inflation with still-low unemployment over the past couple of years, with an emphasis on reducing inflation. In October, the Fed reduced interest rates, concerned about a slowing economy and softer unemployment. With the government shutdown and reduced data accuracy, the Fed appears more cautious about cutting interest rates soon. 

The latest report showed real GDP in the US rising at an annual rate of 3.8% in the second quarter of 2025, but third-quarter economic data is likely to be stalled by the government shutdown, increasing uncertainty. Were it not for the shutdown, GDP is expected to be stable to higher, given future benefits to our economy from tariffs, possible lower interest rates, and reduced regulations.

7 Ways: How To Prepare For A Recession

I don’t do economic forecasting, but I do hope that the government reopens soon so that it is easier to understand where the economy stands. It is not comfortable to see markets decline out of fear, especially if you are nearing retirement and watching your investment accounts go down. When you are younger, you have a lot more time to invest in the market, so you should manage your portfolio from an early age.

You can’t control what happens in the stock market and our economy, but you can change your lifestyle, reduce debt, save more, spend less, and avoid knee-jerk investments by selling out of panic.

Review Your Budget

It is essential to review your budget, spending, debt levels, and ways to reduce spending to save more. When inflation is high, it is more challenging to reduce spending because the cost of goods exceeds the 2% target. The potential of a recession may mean losing a job if you work in an industry susceptible to economic downturns. If so, tightening your budget and living frugally may be in order.

Reduce Your Debt When Interest Rates Rise

The Fed’s efforts to raise interest rates lift most consumer and business borrowing rates, including mortgage, auto, student, and credit cards. That may mean you should postpone plans like buying a home with 30-year fixed mortgage loans over 6% unless you find something special.

You’ll need to continue paying off your debt on time to avoid late charges. Consider options depending on your finances and debt situation.

A recent survey found that 92% of fully employed student loan borrowers are worried that rising costs will make it harder to afford their payments, and one in three borrowers will need to cut back on necessities — food, rent, and healthcare — to make payments.

Eliminate Credit Card Balances

Eliminate those toxic card balances that grow faster than your income. Carrying credit card balances is dangerous, and finding options like a balance transfer credit card, a debt snowball, or the avalanche method, or getting a debt consolidation loan.

If you have a FICO credit score of at least 670, you should consider getting a balance transfer, a type of credit card that lets you move your balance to another card with a 0% APR for a time, though there may be fees.

Snowball or avalanche methods may take time to pay off your balance. The avalanche method is more appropriate for large card balances because it targets higher-cost charges first. A debt consolidation plan may be another option, allowing you to move your debt, including the card balance, to a personal loan. While you won’t get the 0% APR, personal loans should offer lower rates than those charged by credit card issuers.

Reduce Spending, Especially For Discretionary Spending

Review your budget to find ways to save more and reduce unnecessary discretionary spending. Look for low-hanging fruit to cut out spending:

• Reduce subscriptions you aren’t using.
• Go shopping with a list and stick to it.
• Shop for bargains for things you need.
• Using shopping apps and coupons.
• Eat out less, make meals at home, and grill more.
• Enjoy the outdoors, and find free and inexpensive activities.
• Add a passive income stream to put extra money in your wallet.

 

Boost Your Emergency Savings Account

By realizing extra savings, boost your emergency cushion, primarily if you work for an industry or business prone to recessions. As interest rates rise, you can get a higher-yielding saving account at the bank for your emergency fund. Recessions typically have higher unemployment than the current 3.7%.

When inflation was high in the 1980s, it was an excellent time to put extra cash into these accounts. My mom told me she received two TVs and 13% APR on her savings account. Just make sure you understand whether the account has any withdrawal restrictions so you can access your money when you need it.

Persistent Contribution To Retirement Accounts

It is essential to continue contributing to your 401K and Roth IRA or traditional IRA retirement accounts. If your employer matches your contribution, you’ll want to earn it based on the plan. Seeing a 10% decline in your account balances is undoubtedly painful, but these are unrealized, or paper losses, and your retirement may be years away. With the market downturn, you’ll be able to buy stocks at or near bargain levels. Remain diversified with index funds.

There are significantly more challenges for those at or near retirement age and planning to retire soon. It may be an excellent time to speak with a financial advisor to consider options such as taking Social Security earlier or withdrawing money from your retirement accounts if you need extra income due to high inflation.

Investing In A Bear Market

Investing in the best of times can be emotional. Watching your holdings drop in value can paralyze experienced investors. Corrections and bear markets are regular occurrences. It is best to avoid being overly emotional about short-term losses.

Some things to do when investing:

Investors can prepare for potential downturns by holding some cash for potential buying opportunities, though timing your purchases is the challenge.

Don’t time the market. It has yet to be determined whether this is the bottom or whether to expect further declines in the market.

A viable alternative to market timing is dollar-cost averaging, which helps ensure investment discipline. It is a systematic strategy for investing equal sums at regular intervals regardless of the investment’s price. This approach removes the guesswork of timing your purchases. Instead, you are investing the same fixed dollar amount in the same stock, mutual fund, or ETF over a long time. The strategic premise is that investments generally rise more than they fall. By averaging, you purchase more shares when the price is down or below average costs.

When you’re a Buy/Hold investor, you keep a long-term perspective on the economy and the market.

In market downturns, it can be challenging to buy individual stocks without doing some research. Look for leading quality companies with track records of performing well in recessions in more resilient industries, strong balance sheets, and continued dividend growth. You can purchase recession-proof stocks or dividend aristocrat stocks for your portfolio.

When inflation rises, consumers benefit. If you have some cash and seek safety and high returns, there is no better place to go than investing in Series I Government Savings Bonds that currently pay 4.03% in interest and have a AAA rating. There is a $10,000 per-person cap on the purchase amount, but you can buy a bond for each of your children. Alternatively, TIPS (Treasury Inflation-Protected Securities) or Treasury Inflation-Protected bonds provide similar benefits without the cap.

Variable municipal bonds also offer inflation protection for investors, though they usually carry higher risk than treasuries, offset by better tax-exempt benefits for holders.