How to Prepare for a Recession

Bill Nelson is a planning excellence lead consultant at Northwestern Mutual.

As the global economy continues to evolve, the specter of the next recession remains a pressing concern for some of us. The good news is that most economists—who think about these topics every day—don’t feel overly concerned. A Bankrate survey conducted in June 2025 found that economists say the U.S. economy has a 39 percent chance of entering a recession by September 2026.¹ But the economy can change fairly quickly, and pinpointing the exact time of a recession is notoriously difficult. After all, a recession is often triggered by an unpredictable economic shock.

If you’re worried, there are steps that you can take to prepare for a recession. Good preparation can minimize the financial impact. First, you’ll learn the basics of a recession, and then you’ll see some ways you could prepare.

Understanding the basics of a recession

Most nonexperts probably think of a recession as a significant downturn in the economy. Although economists have a more formal way of defining a true recession, the important thing to remember is that it’s a downturn that lasts long enough to impact most people, businesses and governments. During the lead-up to a recession and in the recession itself, the unemployment rate rises, and people stop spending as much. Businesses may slow down their production, see lower profit and may even fail. Stock market declines make headlines, and investors lose confidence. To help spur borrowing and spending, the central bank may lower interest rates. And governments may see big budget deficits.

How to prepare your finances for a recession

If a recession hits, it’ll change the way most of us spend—especially if we lose our jobs or are worried that we might get laid off. We might lose spending power if prices go up and it gets harder to borrow money. And a recession could hurt our long-term finances. While an economic slowdown will impact everyone differently, these five steps can help you prepare.

Revisit your budget

Whether you do a great job keeping your spending on track or you’re barely able to pay your bills, this is the first place to start when there’s economic uncertainty. The goals are to free up some additional money to save and to reduce expenses. That could put you in a better spot if you lose income during a recession.

Start by tracking where your money is going—what’s coming in each month and what’s going out. Group your spending into three categories:

While it’s usually a good idea to save about 20 percent of your income, this may be a time when you want to push yourself to raise that percentage a bit. Put that money into your emergency fund.

But reviewing or creating your budget doesn’t mean that you have to totally deprive yourself. You can probably find some low-hanging fruit—perhaps subscriptions or memberships that you don’t use very often. You might be surprised how much you’re spending on things you hardly use. This is a good time to cut those out and put that money toward savings.

Bolster your emergency fund

An emergency fund is part of a good financial plan. It’s typically an account that’s separate from your main checking and savings—or some other way to easily access cash quickly. That might be a high-yield savings account or a money market account. Your emergency fund is the money that you’ll use to pay your bills if you get a major medical expense, a job loss or something similar that rocks your financial footing. It’s much more efficient than having to put a big charge on a high-interest credit card, especially if a recession is already putting you in a tough spot.

Some people also keep money on hand to take advantage of an opportunity. Even during a recession, a good possibility might come your way. For example, if that perfect piece of real estate that you’ve dreamed about hits the market, it may help to have cash ready for a down payment.

How much should I keep in an emergency fund?

While everyone’s situation is different, a good general rule is to keep about six months’ worth of expenses in an emergency fund. If you’re especially concerned about losing income, then it’s probably better to have more saved. That’s easier said than done, but don’t sweat it too much. The key is to start dedicating more to this account.

Get smarter about your debt

If you’ve been sitting on some high-interest debt (like a credit card balance), you could try to get better terms before a recession hits. Calling your credit card company to negotiate better terms can potentially lead to a lower interest rate, reduced fees or even a higher credit limit—saving you money and improving your financial flexibility. It's a proactive step many people take to optimize their credit card agreements.

During a recession, interest rates may drop. That can make it a strategic time to refinance. If you can secure a significantly lower rate, refinancing could lead to substantial savings on your monthly payment. However, be mindful of additional costs and your credit score, as lenders often tighten their credit requirements during recessions.

When you’re trying to pay down debt, it can feel like you’re just barely keeping your head above water. And if things get bad enough, it may be tempting to use some of your retirement savings, like 401(k) balances, to make things easier. Although using money from a retirement account to pay down debt might help in the short term, it can create long-term problems.

Stop watching the stock market

Stocks serve an important role in a good financial plan by helping you grow your wealth over time. And while we all know the market doesn’t go up in a straight line, watching market swings can be emotional. It’s very common to want to make changes when stocks are losing value—especially if you’re feeling the effects of a recession. But doing so can be costly. Instead of trying to time the market, a better bet for most investors will be to stay invested for the long haul.

To illustrate the point, consider a $100,000 investment in stocks that represent the annualized return of an index called the S&P 500 over the past 20 years. Missing just the 10 best days of performance could cost you nearly $225,000 in gains. If you miss the 30 best days, you’d lose out on nearly all the growth you could have received over that period. The problem is that you never know when those “best days” will be.

It can be easy to want to make changes to your investments or maybe even sell some of them to cover emergency expenses. But as the chart above shows, it can also be one of the most expensive long-term mistakes that you can make during uncertain times.

We recommend working with your Northwestern Mutual financial advisor to make sure your money is invested in different types of financial tools—which is diversification. This approach can help reduce some of the big risks of investing.

Update or start your financial plan

We recommend having a financial strategy in place before things get tough. A thorough financial plan can give you confidence that you’re on track to reach your goals, even if we get hit with a recession. Your planning should go beyond having a retirement account—instead, it should reflect all of your investments and insurance for a complete financial picture.

Your Northwestern Mutual financial advisor will copilot your plan with exclusive planning tools and solutions tailored to your needs. By working together, you can stay on track to achieve your financial goals, even as life changes.

Chart is for illustrative purposes only and not intended as a recommendation. Past performance is not a guarantee of future results. All investments carry risk, including potential loss of principal, and no investment strategy can guarantee a profit or completely protect against loss. Indexes are unmanaged and cannot be invested in directly.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

1. Foster, Sarah. “The U.S. economy is slowing—and the nation’s top economists don’t expect it to improve much over the next year.” Bankrate. October 23, 2025. https://www.bankrate.com/banking/federal-reserve/economic-indicator-sur….