5 Ways to Protect Your Finances in 2025 from a Recession

You hear the word recession and might be reminded of the Great Recession from late 2007 to mid-2009. A recession is typically defined as a decline in the market and the economy, and while that sounds serious, and it is, there is no need to panic just yet.

When it comes to the market, it is important to understand that it runs in cycles. How things pan out is mostly out of your control, but what you can control is how well you prepare. After all, that is what a solid financial plan is all about.

So, if you are wondering how to prepare for a recession, here is what you need to do.

Below are 5 things you can do to safeguard your finances in 2025 from a recession:

1. Start by making sure you have an emergency fund that can cover your needs for at least six months or more

When the word recession comes up, one of the first worries on your mind is probably your job or your income. During a recession, the job market usually takes a hit. Companies may want to cut costs and consequently lay off employees. That is why having an emergency fund is a must-have in your recession preparatory kit.

An emergency fund has one job and one job alone – to protect you when life throws a curveball. Whether it is a job loss or a medical emergency, the fund acts like a safety net, so you do not have to rely on high-interest debt. Taking on debt during a recession can be a slippery slope. You will pay interest rates on the borrowed money, and the pressure to repay can make a bad situation worse.

So, how do you build an emergency fund that actually works for you?

You can start by figuring out your essential monthly expenses. This typically includes expenses such as rent or mortgage, groceries, electricity, gas, school fees, insurance, and any other non-negotiable costs. You need to skip the fun stuff for now. So, no Friday night takeout, movie tickets, or impulse shopping sprees. Your emergency fund is about covering the basics. Once you have a number, multiply it by six. That is the minimum you should have in your emergency fund. If your monthly essentials come to $5,000, you should aim for a minimum of $30,000. If you have dependents who rely on your income, you may even save more.

You need to make sure that this fund is reserved for emergencies only. If a recession does hit and you manage to keep your job, you need not withdraw from your fund. However, if push comes to shove, you will have the money you need to survive and keep your household running.

Do not worry if $30,000 sounds like a lot. Most people do not build an emergency fund overnight. You can start small with small contributions and set up an automatic transfer to a savings account. Also, you must revisit your emergency fund at least once a year. If your expenses have gone up, your rent has increased, or you now live in a city with a higher standard of living, your fund should reflect that. An emergency fund built three years ago probably will not cut it today.

2. Create a secondary stream of income, so you have a backup in case you lose your job

An emergency fund is great, but it is not a forever solution. It can keep you afloat for a while if you suddenly lose your job, but eventually, you will need more. That is why having a secondary stream of income is essential.

A secondary income stream is any money you earn outside of your main job. Unlike an emergency fund, which is a pool of money you have saved, this is recurring income that continues to come in. And you do not have to wait for a recession to start. In fact, it is much better to begin when things are stable.

Back in the Great Recession, the United States alone lost over 8.7 million jobs, according to the U.S. Bureau of Labor Statistics. Jobs declined by about 6%. Let’s say you lose your job during a downturn. Your emergency fund might hold you over for a few months. But if you have not landed a new job by then, things can get stressful. Now imagine that alongside your savings, you also have a small but steady income coming in every month – say $500 from freelancing, $500 from a rental property, or $600 from an online store. This kind of financial cushion can buy you peace of mind and give you more time and flexibility during stressful times.

There are plenty of ways to create this second income stream. You could take on a part-time job, maybe something flexible that fits around your main job, like tutoring at a local college, working a few hours at a bookstore, or even influencing on social media. If you are looking for a more passive approach, you can diversify your investments by including income-generating assets, such as dividend stocks or rental real estate. For example, if you live in the suburbs, you can rent out a spare room to teenagers for band practice. You can also leverage your creative side if you can and sell handmade crafts on platforms like Etsy or eBay.

So, start thinking now about the skills you possess or the hobbies that can be turned into a profession. And remember to pick something that fits into your lifestyle so you can pursue it for the long term.

3. Do not panic and start liquidating your investments – remember to play the long-term game

The most important thing to understand about investing is that you do not actually lose money unless you sell at a loss. The red numbers in your portfolio are only losses on paper. Markets go up, and markets go down. It is their natural cycle. When a recession hits, it can be jarring to see your investments turn from green to red. But that does not mean you need to panic.

It is important to stay calm and avoid making emotional decisions during this phase. Selling off your investments if and when the recession hits in 2025 will lock in your losses. But if you hold steady and the market recovers, as it almost always does, your money can bounce back again. It can be tough to stay put when everything feels uncertain, but patience can be rewarding in the long run. History shows that the market always recovers. So, your best move is to leave your investments alone and stay the course. In fact, if your finances allow it, you can keep investing during market downturns. When prices fall, you can buy at relatively lower costs, also known as the buy low, sell high strategy. Putting this strategy into action is how you survive a recession the smart way. While this might feel counterintuitive, investing in a recession can actually lead to bigger gains when the market rebounds.

Of course, if you are facing a cash crunch, have lost your job, or are struggling to cover essentials, it is perfectly fine to hit the pause button on new investments. But even then, you must try to resist the urge to touch what is already invested. Look into your emergency fund, consider picking up a secondary source of income, and explore other options before dipping into your portfolio. Also, do not forget that liquidating your investments early may come with penalties or tax consequences, especially if you are pulling from retirement accounts, such as the Individual Retirement Account (IRA) or the 401(k). Plus, once you take that money out, it loses its power to grow over time.

4. Cut back on your expenses and start saving more

Another simple and doable tip to protect yourself during a recession is to spend less. It may sound basic, but cutting back on your expenses is your first line of defense, and the best part is it is completely within your control. When times get tough, the less you spend, the more you can save, and the easier it becomes to ride out financial uncertainty. During the Great Recession, the median family income dropped by roughly 8%. A frugal lifestyle helped people stay afloat during such challenging times. It can help you, too, without needing to tap into emergency savings, take on debt, or liquidate your investments.

Moreover, spending less and saving more is not just about the money. It is also about changing your mindset. Living with a little less helps you mentally adjust to a more frugal lifestyle. It builds discipline. It trains you to separate your wants from your needs. Such a mindset can be a real asset when the economy slows down.

So, where do you start?

Begin by tracking your essential expenses. Once you have the list, take a good look at what is left. You can cut back on non-essentials by following these tips:

• Cook more meals at home instead of ordering in
• Swap expensive brands for more affordable options
• Shop at discount or bulk stores to save on groceries and household items
• Downgrade your phone plan

Every little bit counts. And remember, this does not have to be forever. This is a temporary lifestyle adjustment that can help you stay financially stable in the short term and even strengthen your savings habits in the long run. Take control where you can. Spend less, save more, and you will be better equipped to handle whatever comes your way.

5. Speak to a financial advisor about how to protect your money from economic collapse

A recession does not necessarily impact everyone in the same way. That is why speaking to a financial advisor can be advised, especially if you are unsure about how to protect yourself during a recession.

Let’s say you are in your 20s or 30s. In that case, riding out a recession by staying invested for the long haul usually works well. You have enough time on your side, and the market tends to recover over time. But what if you are in your 60s or 70s and getting ready to retire? If the market takes a downturn and you are already drawing down from your retirement accounts, you might be locking in losses without meaning to.

Consulting a financial advisor can help you navigate this situation in a less damaging way. They can help you create a strategy that fits your specific stage of life. For instance, if you are nearing retirement, they may suggest delaying withdrawals from your investment accounts during a downturn. Instead, you could consider taking your Social Security benefits earlier than planned. Yes, most financial advisors recommend delaying your Social Security checks to increase your monthly payouts later, but in a situation where markets are down, tapping into it sooner might actually make more sense. This can give your investments time to recover while ensuring financial liquidity.

Let’s take another scenario:

Say you lose your job during a recession and do not have a strong emergency fund to rely on. You might be tempted to start liquidating your investments. But some withdrawals come with tax penalties, and others could severely impact your long-term financial health. A financial advisor can help you weigh your options. They can come up with a more tax-efficient way to access your assets.

The point is you do not have to figure out how to prepare for a recession alone. A financial advisor can give you sound advice on finding a way out. Whether this means stretching a retirement account, deciding which investments to hold onto, or even getting information on how long the recession is likely to last, having an expert by your side can be reassuring in many ways.

Are you prepared for a recession?

Take a moment and check how many of these steps you are already following? Maybe you have already built an emergency fund. Great, that is a strong start. But perhaps your spending has been a little all over the place lately, and that is something you can start tackling right away.

You might also want to look into creating a second source of income through a side hustle or passive income from investments. Having a backup income stream is important when times look lean. If you have older kids or teenagers at home, this might be a good time to encourage them to take up part-time jobs. This will help them support their own expenses and take off some of your financial burden.

If your investments have you worried, remember you can talk to a financial advisor. An advisor can help you get a clear plan based on your situation. Our free advisor match tool can connect you with 2-3 seasoned financial advisors who can guide you on how to prepare for a recession.

In the meantime, keep your focus on the long term. Cut back on your spending where you can. Stay calm, stay informed, and lastly, do not panic. Panic can cloud your judgment and probably make things worse.