Experts: How to prep for recession

There are many things in life worth being prepared for, as the Boy Scout motto says, and a recession is one of them.

Rumors of a recession, or a consequential decline in economic activity, have been swirling for months. Michael Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, said in his forecast, the odds of a recession in the new year are substantial, at about 50/50.

Even though the most recent November jobs report was strong and if the economy manages to bounce back from high inflation, the U.S. could see a recession sometime in 2023. Additionally, Hicks said, even if there isn't a recession next year, it could feel like it, because of the Federal Reserve raising interest rates to combat inflation, also known as tightening interest rates.

"There are plenty of job opportunities," Hicks said. "There's a lot of demand for goods, but there are some emerging frictions in the short term related to the Federal Reserve tightening interest rates."

The prospect of an economic recession is one that sends a chill down the spine of many. But luckily, there are ways to prepare so that an economic downturn may not be as big of a hit.

Even if the economy avoids a recession in 2023, there are actions you can take to ensure financial stability no matter the turns the economy makes.

Cash-flow flexibility

In the short term, finance expert and professor of practice at Indiana University Bloomington Gregory Renn said to live within your means, avoid going into debt and save wherever possible. Having cash-flow flexibility is essential, because it means that you can more quickly access funds for essentials when the economy takes a downward turn.

Renn recommends living within your means and making sure that fixed expenses like rent and car payments amount to one-third or less of your after-tax monthly income.

"If it's above that and you have anything go wrong due to the recession, you're not going to have that flexibility and the recession is going to cause you stress," Renn said. "But if you're lower than that, then you're starting to pave the way towards being able to write up a recession without a significant impact to your lifestyle."

Cut down debt

Start with paying down credit card balances first, and then work towards making other, non-mortgage payments. Your mortgage should be the last thing that you start to pay off, because you can still get a tax break on interest paid on a mortgage, according to Renn.

If you have a lot of debt you can't pay off, consolidation is also an option. However, that can affect your credit score, so the step should be taken sparingly.

"That should be more of a parachute option rather than a first choice because there's some costs," Renn said.

Create an emergency fund

This should be three to six months of all expenses — three if you have two sources of income, six if you have one. Eventually, building up to 12 months that would cover expenses is the goal, Renn said.

Every little bit that can be squirreled away helps, even if it's just a few dollars. That way, if something urgent like a car repair comes through at a time when money's tight or you're unemployed, you'll be able to weather the storm.

"That will allow you to make that repair and get your job and do all those things that you live your life without disruption," he said.

Additionally, a recession is a time to put off making big purchases that might put a dent in savings or cash flow, Renn said.

"Lower your expectations of what you can purchase," he said. "So try to delay big purchases during the recession or what kind of return you can make on your investments during a recession."

Lean on community

During tough times, it's important to have people in your corner to rely on. But during a recession, that support can sometimes be financial, in addition to love and care from family and friends.

"Know where if you have to, you can go for some help, whether it's financially or emotionally, during a recession itself," Renn said.

In terms of thinking about your next job, Renn said networking is key.

"Think about who you know, and whom you might know at work — your friends, your family that might be able to help you get back onto your feet regarding employment, if necessary," Renn said.

Long-term goals

Recessions are difficult times. But for those who are fortunate enough to be able to be prepared, it can be a time to make big financial decisions, experts say.

"There can be some opportunities, but you have to be in a position to be able to take advantage of them," Renn said.

During a recession, home prices generally drop. With mortgage rates at the highest they've been in years, this could be a good sign for those wanting to buy a house. Hicks recommends saving now in the event that interest rates decrease drop, making home ownership an affordable possibility for people sometime soon.

A recession would also mean price reductions and an end to the historic inflation that has tightened the budgets of Americans for months.

If you have the ability to, Hicks said, recessions are a good time to consider going back to school.

"Investing in yourself during a recession is a really good time to do it," he said. "because the benefits of staying in the labor force are so much smaller at a time when wages aren't high, and when there's not as many good job opportunities."

However, Renn said, gaining additional education should not be done at the expense of your financial welfare. If you're happy in your current job, and like your manager, it's not necessarily the time to take on additional debt.

Resources during a recession

When money is tight in times of economic downturn and recession, community organizations can provide support.

Gleaners President & CEO Fred Glass said that at Gleaners pantries in Indianapolis and across the state, they are starting to see an increased financial need among Hoosiers.

"If we, pantries and food banks are a canary in the coal mine, I think we're coughing pretty hard, because we are seeing the impact of adverse economic conditions on the people we serve," Glass told IndyStar.

Demand for food and resources from Gleaners has increased by 50% since the start of 2022, Glass said, and is nearing peak-pandemic levels of need. One week in early December, Gleaners' Indianapolis drive-thru pantry served 811 families. That poses a problem, because the bank is slated to receive less excess protein from the federal government this year — around 10 million pounds, as compared to 20 million in 2021.

While Glass can't pinpoint an exact reason for this increased demand, as unemployment is low, he said that inflation and rent increases are placing a strain on families.

"Our people are really feeling the pinch and getting forced into a decision (of) well, 'Do I keep my lights on? Or do I eat?'" he said.

Glass said that people shouldn't be shy about coming to Gleaners for food, even if they've never gone to a food pantry or bank for help before.

"These are working people, often the elderly, often single-parent households ... and new people seeking these services that haven't sought them before," he said. "That's just a fact."

Recessions by nature are characterized by increased job losses, which means there may be Hoosiers can file for unemployment insurance online at the Department of Workforce Development's website: www.in.gov/dwd/indiana-unemployment/file/.

The bottom line

If you can afford to keep your job now, Renn's advice was to stay and embrace the stability.

"Usually the first jobs in are the lowest paying jobs, or the first jobs out during a recession," Renn said. "So if you can control some of that, do control it right now and wait."

While recessions can be difficult to weather, they're also a normal part of the life of the economy's life cycle.

"Remember that recessions are normal," Renn said. "It's not great, but there are opportunities for those that are prepared."

Overall, Hicks said, the person who's truly prepared for a recession is already looking to the future.

"Use this recession as an opportunity to get ready for the next one because it's inevitable," he said.

Contact IndyStar business reporter Claire Rafford at [email protected] or on Twitter @clairerafford.