Financial Advice to Ignore During a Recession

Recessions occur on average every six to seven years in the U.S. The standard definition of a recession is two quarters in a row when the economy contracts—basically, a significant and widespread decline in the economy. It’s no fun when a recession brings a dip in consumer confidence, layoffs, and lower stock market prices, but recessions are a natural part of the business cycle. 

Another thing about recessions. Nearly every time, they bring unpredictable money problems and bad financial advice.

One thing to remember about recessions is: they all end. In fact, the average length of recessions going all the way back to 1857 is less than two years. That’s a short period in most people’s lives. 

Here are some ways to protect and strengthen your finances during an economic downturn: 

• Explore debt relief strategies

• Shore up your emergency fund

• Cut spending where possible

• Network professionally

Perhaps most important: Ignore the following bad financial advice, which could lead you down the wrong path. 

We’ve rounded up some of the most common pieces of advice that won’t serve you well during a recession—for example, “don’t worry about the future.” Then, we’ll tell you what to do instead. Our approach is safety first. 

In other words, it’s more important to avoid the worst outcomes than to hit home runs—though we hope for the best, and we stand behind all strong opportunities for growth.

John Bogle, who founded the investment firm Vanguard, always advised simplicity in investing. Read on for simple alternatives to bad advice. If you come across any of these suggestions, you’ll know what to do.

What is a Recession and How Does It Affect Your Finances?

A recession is an economic downturn that could last for months. During a recession, people lack confidence in the near-term future, usually because of a triggering event. People spend less, businesses profit less, and confidence continues to go down. This downward spiral is usually reflected by lower prices in the stock market.

What triggers a recession?

Many factors can trigger a recession, such as war or a pandemic, to name two. However, economic conditions are more likely to cause a recession, including: 

• A financial crisis

• Supply and demand shocks—for example, an energy crisis

• Falling asset prices

• High inflation

• Poorly timed interest rate increases 

How a recession affects your finances

Recessions can be frightening because a lot seems to change very quickly. Mass layoffs, stock market downturns, and lower interest rates often occur during a recession. 

Layoffs come about as businesses lose confidence in sales. A business lays off employees to compensate for poor earnings. Some businesses are more affected by recessions than others.

Stock market prices go down as people sell for various reasons. In general, loss of confidence in the future is reflected in stock market prices, which go down as people grow pessimistic. The opposite often happens for gold, which is considered a safe haven that outlives bad markets.

Once it agrees a recession is happening, the Federal Reserve usually lowers interest rates to stimulate the economy. When interest rates are lower, borrowing money is cheaper and savings accounts pay less. That makes saving less attractive, which can lead to people spending more.

Our advice

Tune out the headlines and focus on what you can do to stabilize your finances. You might be in an excellent position to ride out a recession. If your position is very strong, you might even take advantage of it to purchase shares of great businesses at good prices. 

If not, that’s okay. Plans can be changed, and a recession is temporary. Prioritize earning more than you spend. Budget, cut down on expenses, and hold off on big purchases. If you must, work somewhere that isn’t your forever home—you can switch jobs down the road.

Here are a few things NOT to do in a recession. 

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1. Don’t Worry About the Future 

You have to consider the future. Like it or not, it's coming. If you’re told not to worry about it, you could lose focus on your long-term financial goals.

Recessions don’t last forever, and you don’t want to make decisions based on a temporary condition. 

Before you make any financial decision, think about how it could affect your finances in a few years. For example, taking money from your 401(k) to pay bills could derail your retirement plans. 

Not saving for retirement is another poor choice for your future self. Even if you reduce your retirement savings to keep more cash on hand, continue to save. Saving 5% of your income instead of 7% or 8% will still be a great addition to your nest egg. 

Our advice: The better course is to explore other ways to meet your current needs besides turning to credit cards or your retirement savings. 

For example, if you're having a hard time covering your credit card bills, ask your creditor whether you can enroll in a hardship program instead of just stopping payments without a plan. If your needs are longer term, consider a more lasting solution like a side gig that pays the bills.

2. Don’t Hold Out Until You Find the Perfect Job

Things cost money. And in tough times, they seem to cost more. You need a job to cover your expenses. 

You may be set on finding a rewarding new position at the same pay and salary level. But this may not be possible during an economic downturn, when there are more job-seekers than jobs.

While you may have unemployment benefits to help cover the bills while you’re job-hunting, holding out for the perfect new job could be a mistake. Unemployment benefits don't last forever, and a long gap on your resume could hurt your future prospects.

Our advice: If you can find a job that uses your skills, isn't a huge step down, and that covers the necessities, you should probably take it even if it isn't your dream job. The work might even turn out to be enjoyable—and even if it doesn’t, the job doesn’t have to be forever. It's far better to be employed during the recession and change jobs after, when more opportunities open up. 

3. Don’t Follow the Stock Market Closely

The danger of watching the stock market is that your fear of losing money could push you to sell at a bad time. 

If you have money invested in a 401(k), IRA, or taxable brokerage account, it’s tempting to think you should do something during a recession. You may hear that you should sell before the stock market plunges.

Don’t sell out of fear—this advice comes straight from investing experts like Warren Buffett. Have a portfolio that’s balanced for your individual tolerance, taking into consideration risk appetite and your age. If you’re in your 20s or 30s, you have many decades for the market to right itself. Remember, no one—not even the experts—can accurately time the market. 

Leaving your money invested means you’ll likely see your account balance dip. Recoveries are inevitable after recessions, so eventually your investments should bounce back—and they generally do. If you sell, though, you lock in the losses.

Our advice: The wise way to invest is to create a sound, long-term plan that you stick to even in turbulent times. When the market is rocky, don’t read your financial statements or obsessively follow stock market news. Financial planners often refer to this as shutting out the noise. Instead, just stay the course. 

4. Don’t Worry About Paying Down Debt

Putting a pause on making extra debt payments could mean you end up paying more in interest over time. You might hear that it’s better to keep more money in your savings account, in case you lose your job.

If you have no emergency savings at all, this might make sense, since things could go sideways during a recession, and you'll need money. However, if you already have an emergency fund, there's no good reason to stop your debt paydown efforts.

Our advice: Continue to make as many extra payments on your debt as you can. Getting through a recession is easier if you're debt-free. Explore strategies such as debt consolidation, as recessions often drive down interest rates. Reducing the rate on your debt through consolidation could make it easier to pay off. 

Do These Instead: Smart Financial Strategies in a Recession

We’ll cover a few smart financial strategies you could use to weather a recession. These reflect our safety first approach to market downturns.

Maintain an emergency fund

Do your best to keep it intact. While this is always a useful strategy, it’s even more important during a recession. If you lose your job, it may take a while to find a new one. Avoid withdrawing for non-emergency spending, such as celebrations or home renovations.

Review and adjust your budget

Track your essential spending—the things you can’t live without—and separate it from the non-essential costs. Ideally, you could substantially cut back on non-essentials or find cheaper alternatives. A temporary bare-bones budget could let you boost savings if you’re still employed or let you stretch your savings if you need them to get through a tough time. And if you do hit a snag like job loss or reduced work hours, you can quickly pivot to your emergency budget. 

Keep money available

Keep some cash where you can reach it easily, like a high-yield savings or money market account. Tying up money in long-term CDs or traditional IRAs may not be your best bet during a recession, since you could face penalties or delays getting to your funds if you need them.

Don’t lose sight of your retirement goals. A Roth IRA is a great option because you can always withdraw your contributions (though not your earnings) without penalty. It gives you flexibility now while keeping your long-term savings growing for the future.

Keep cool

Action is great if you’re running away from tigers, but it’s usually unnecessary during a market downturn. If you sell investments when the stock market is plummeting , you’ll just lock in the loss. Keep cool, and don’t make investing decisions when you’re feeling emotional. 

Where to Keep Your Money During a Recession

Keep your money in a FDIC-insured high-yield savings account. The Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 per depositor per bank. Even if a recession causes your bank to go out of business, the government has your back. Credit unions have a similar protection through the National Credit Union Administration, which also insures checking, savings, and certificate accounts in credit unions. 

Keep money in a high-yield savings account to earn interest on your deposits. A high yield is relative—the best accounts are those that offer the highest rates.

We Have Some Good Financial Advice For You

Now you've read four pieces of bad financial advice during a recession and our alternatives for what you should do. For all the stress you might feel during an uncertain economic time, forming your own financial plan can ease the pain. 

Find out more about the type of help we can offer.