Recession-proof your finances with these 5 steps before the economy tanks

If you watch any economic news, you’ve probably seen economists biting their nails while raising the alarm about the dreaded “R-word”: recession.

These financial experts are so terrified of a potential recession that they refer to it obliquely, in the same superstitious way your Great-Aunt Esther used to whisper the word “cancer.” But refusing to call a recession by its name does not reduce financial panic, improve the stock market, or even make julienne fries: It just makes a recession seem like an unstoppable force coming to ruin our lives, which is simply not true.

While there isn’t much that an individual can do to avert a recession, there’s plenty you can do to shore up your personal finances to prepare for one. Here’s how you can protect yourself and your finances in case a recession materializes this year.

What is a recession anyway?

Since economists talk about recessions in the same frightened tones that teens in 80s slasher movies discuss Freddy Krueger, it’s easy to assume a recession is the economic equivalent of sudden death.

But a recession is a specific and definable economic condition, not a terrifying supernatural monster. The National Bureau of Economic Research (NBER) describes a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Although other economic experts may define a recession using slightly different terms or metrics, there are economic indicators that all recessions typically share. These indicators include a falling stock market, a reduction in consumer spending, and widespread cost-cutting within businesses, which often includes layoffs.

All in all, it’s not great–but it is survivable.

How to recession-proof your money

There are several important steps you can take to prepare yourself and your finances for a potential recession. What’s even better is that these strategies will benefit you even if the recession never comes.

Determine your baseline expenses

Job loss is one of the biggest economic risks an individual might face during a recession. Layoffs are common during recessions and it’s tough to find a new position when so many businesses are tightening their belts and you’re competing with a lot more potential job candidates.

Even if you’re certain your job is safe, now is a good time to figure out your bare minimum budget needs. How much money do you need each month to keep the lights on and the dog in kibble?

Going through this exercise will help you determine your baseline monthly expenditures—which is a number you need to calculate your emergency fund goal.

Emergency fund math

Remember how financial experts are constantly harping on the need for an emergency fund equal to three to six months’ worth of expenses? Most people ignore this advice since it sounds completely unhinged. After all, the average person can’t afford to save the equivalent of what they spend in six months.

But the common advice about the ideal size of an emergency fund is based on your monthly baseline expenses, not how much you spend per month. In other words, a recession-resistant emergency fund will have enough cash to cover three to six months’ worth of your bare minimum, keep-the-wolf-from-the-door-and-yes-that-means-cancelling-Netflix expenses. You don’t have to have enough set aside to cover your normal spending habits.

Once you have calculated your baseline monthly budget, multiply it by three to get your initial emergency fund goal. Having at least three months’ worth of expenses set aside in an emergency fund can give you the cushion you need in case of a job loss or a pay cut.

Pump up your emergency fund

If your current emergency fund is looking a little anemic (or non-existent), don’t panic! Remember that any amount of money you can set aside now will be helpful if you get a pink slip.

Start with an automatic transfer to your savings account with every paycheck. Even as little as $20 per transfer will add up over time. If you get a tax refund this year, use a portion of it to bulk up your savings. And since you have just determined your baseline budget, challenge yourself to cut some of the non-essential costs you identified and put the savings into your emergency fund.

Tackle credit card debt

The average cardholder is carrying $6,580 in credit card debt, and paying 22.89% interest on that balance. That equates to a minimum monthly payment of over $190 that would take nearly five years to pay off. And it would be an albatross around the neck of anyone struggling financially during a recession.

If you are carrying a credit card balance, do what you can to pay it off or pay it down while you’re still in relatively good financial shape. If making larger-than-minimum payments to your credit card is out of reach, consider a balance transfer to a 0% interest rate card or taking out a low-interest rate personal loan. It’s much easier to quickly pay off a debt when you’re not also paying nearly 23% in interest.

Identify other sources of ready cash

Recessions and layoffs don’t arrive at anyone’s convenience. That’s why it’s important to put a plan B in place for additional cash now, just in case you’re not prepared with a robust emergency fund and paid-off credit card if and when the ax falls.

Someone looking to generate cash in a hurry generally can either plan on borrowing money or selling something. But thinking through your options ahead of time can make it possible for you to immediately pull the trigger on your plan if you need it.

Some specific ways to prepare might include:

• Open a Home Equity Line of Credit (HELOC) now that you don’t touch unless you need to access cash.
• Get ready to potentially sell a car by researching its value, gathering the title and other paperwork, and excavating the petrified french fries from under the driver’s seat.
• Identify and prepare items in your home to sell on Facebook Marketplace or the like.
• Find out if your brokerage allows you to borrow money against your investments.

Recession doesn’t mean ruin

While no one will ever give three hearty cheers for a recession, it doesn’t need to be a source of fear. You can prepare your financial house for a recession by calculating your baseline expenses, beefing up your emergency savings, paying down debt, and identifying backup money sources you can tap if your savings aren’t enough. A recession may not be pleasant, but it is possible to get to the other side—even if you call it by its full name.