The odds of a recession are rising, fueled by an ongoing trade war that could drive up prices, slow consumer spending, and trigger mass layoffs or business closures. Some economists might call this stagflation—a scenario worse than a typical recession, where prices rise despite stagnant or negative economic growth. At least in a recession, prices usually fall, making goods and services more affordable as demand wanes.
While we’re not officially in a recession or stagflation yet, the warning signs are flashing red. When uncertainty rises, consumers pull back. As spending slows, business revenues decline, hiring freezes, and investments stall.
Losing your job during a recession could take years to recover from, if at all. That’s why preparing now is crucial. Drawing from my 13 years in finance at Goldman Sachs and Credit Suisse, and my experience achieving financial independence at 34, here are the 10 best ways to protect yourself, and maybe even thrive, during the next recession.
The 10 Best Ways To Prepare For A Recession
For background, I started Financial Samurai in 2009, during the worst recession of our lifetimes. I've written over 2,500 personal finance posts since then. I got my MBA from Berkeley, undergrad degree from William & Mary and retired in 2012 at age 34 with about $3 million.
1. Fix What You’ve Been Delaying—and Stock Up
With inflation potentially increasing, it’s smart to lock in prices on necessities now. That means fixing what’s broken and stocking up on essentials before they get more expensive.
Own a car? Handle major maintenance now—brakes, tires, belts, battery, filters, etc. Once warranties run out, unexpected auto repairs can crush your budget.
Same with your home: if your roof, windows, or appliances are on their last legs, consider replacing them while prices are still manageable. And don’t forget your health. Book checkups or procedures before insurance premiums and deductibles rise.
2. Keep 6–12 Months of Living Expenses in Cash
In a recession, cash is more than king—it’s security. While inflation eats away at its value, having 6–12 months of expenses in a high-yield money market or Treasury fund (yielding ~4%) means you won’t have to sell investments at a loss if markets tank. If you an encounter a layoff or an emergency expense, you've got a financial cushion.
3. Rebalance Toward Inflation-Resistant Assets
Stocks tend to do poorly in a recessionary environment as earnings growth slows or declines while valuations contract. In a stagflation environment, inflation remains elevated, as a result, you may want to invest more in inflation-resistant assets such as:
- Commodities (oil, agriculture, metals)
- Real estate
- TIPS (Treasury Inflation-Protected Securities)
- High-quality dividend stocks
- Gold and energy stocks
4. Define Your Investment Goals—Clearly
Your time horizon influences your risk tolerance. If you’re investing for retirement 20 years out, stay the course. But if you need cash within two years—for a home, tuition, a business, or retirement—shift into more liquid, defensive assets.
Knowing why you’re investing makes it easier to remain disciplined when markets are volatile.
During a recession, you also want to come up with a bear market investment game plan. It will help you stay the course during the most difficult and scary times of the downturn.
5. Protect Your Job—or Find a More Secure One
Now’s the time to double down on your value at work: show up early, contribute more, and upskill. Build relationships with your manager and team. It's much harder to lay someone off you see, like, and trust. The $20 you spend taking out your manager might be the best $20 spent ever as you protect yourself from getting laid off.
Alternatively, switch to a more stable industry or employer while the job market is still relatively strong. It’s always easier to land a job while employed. Ideally, negotiate a layoff with severance and line up a new role with a delayed start date—doubling your income during the transition.
6. Build Alternative Income Streams
Relying solely on your paycheck is risky, especially during a recession. Consider building as many income streams as possible. Some examples include:
- Rental income
- Stock dividends
- Bond income
- Freelancing
- Consulting
- Side businesses
- Gig economy (ride share, delivery, being a handy person)
- Giving lessons
Focus on recession-resistant sectors like healthcare, education, utilities, and essential services. Many businesses and consumers will cut discretionary spending during hard times—so position yourself accordingly. The typical millionaire has seven passive income streams. How many do you have?
7. Collect Outstanding Debts
If you’ve lent money to friends, family, or businesses, now is the time to collect. As financial conditions worsen, defaults become more likely. You may never get your money back if the economy takes a big hit.
8. Be a Proactive Landlord—or a Thoughtful Tenant
If you own rental property, stagflation presents a dual risk: tenants may struggle with rising rent and delayed payments, while your own costs (maintenance, insurance, taxes) climb.
Stay proactive. Maintain open communication with tenants, adjust rents strategically, and prioritize occupancy over maximum rent. If you're a tenant, fix any outstanding issues in your lease to avoid giving your landlord reasons to raise your rent more than necessary.
9. Reassess Your Retirement Withdrawal Strategy
f you're retired and relying on portfolio withdrawals, consider lowering your safe withdrawal rate. The time to be more conservative is now. The traditional 4% rule may not hold up during a recession or a period of stagflation, when asset prices are under pressure and inflation remains elevated.
Once economic growth resumes and markets stabilize, you can gradually increase your withdrawal rate again. In the meantime, consider taking on light consulting work or part-time income to help bridge the gap.
Interestingly, if your finances are solid and you're ready to leave work behind, retiring during a recession can actually make sense. When the job market is tight and promotions are scarce, the opportunity cost of quitting is lower.
If you've done the math and your wealth can support your lifestyle, retiring during a downturn puts you in a strong position. As the economy recovers, your investments are likely to rebound, providing more financial breathing room in retirement.
10. Use the Downturn to Invest in the Future
During a recession, the stock market typically sells off. Instead of running away from it, consider leaning in and dollar-cost averaging for your retirement and your children's future. Use this time to contribute a little more to your 401(k), IRA, Roth IRA, 529 plans, and custodial investment accounts.
Chances are high that 10 years from now, you’ll be glad you stayed the course—and even more grateful you invested a little extra when prices were down. Just make sure you always maintain at least six months of living expenses in cash before investing more.
It’s Time to Prepare, Not Panic During A Recession
Recessions—and especially stagflation—test the resilience of even the most disciplined planners. But they also reveal opportunities for those who stay level-headed and proactive.
The key is to shift from a mindset of fear to one of strategy. Tighten your expenses, boost your cash reserves, diversify your income streams, and lean into long-term investments while others retreat. Recessions don't last forever, usually between six months to two years. If you can stay focused when others lose confidence, you'll come out stronger on the other side.
Most people only realize their financial weaknesses when it's too late. But you don’t have to be most people. With preparation, patience, and perspective, you can not only survive an economic downturn, but you can also use it as a launchpad for lasting financial growth.
About the Author:
Sam is the founder of Financial Samurai and the Wall Street Journal bestselling author of Buy This, Not That. His latest book, Millionaire Milestones: Simple Steps To Seven Figures, is set to become a must-read for those seeking financial freedom. He retired in 2012 at age 34 after working in investment banking for 13 years and has been helping others achieve financial independence ever since.
