5 Things You Shouldn’t Do During a Recession (2024)

In a sluggish economy or an outright recession, it is best to watch your spending and not take undue risks that could put your financial goals in jeopardy. A recession increases the risks to your financial well-being. Being prepared and taking a few simple steps can help you weather the economic storm.

Below are some of the financial risks that should be avoided during a recession.

Key Takeaways

  • When the economy is in a recession, financial risks increase, including the risk of default, business failure, job losses, and bankruptcy.
  • Avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
  • Don't quit your job if you aren't prepared for a long search for a new one.
  • If you own your own business, consider postponing spending on capital improvements and taking on new debt until the recovery has begun.

1. Co-Signing a Loan

Co-signing a loan is a risky commitment even in flush economic times. If the borrower does not make the required payments, the co-signer will be required to make them instead.

During an economic downturn, the risks associated with co-signing on a debt are even higher, since the borrower as well as the co-signer may face an elevated likelihood of losing a job or seeing a decline in business income.

Co-signing potentially leaves you on the hook for the life of a loan. Consider other ways to help the borrower if you can.

That said, you may find it necessary to co-sign for a family member or close friend regardless of what is happening in the economy. In such cases, it pays to have some savings set aside as a cushion. Or, instead of co-signing, you might help with a down payment or make a personal loan rather than leaving yourself on the hook for the co-signed loan.

2. Getting an Adjustable-Rate Mortgage (ARM)

When purchasing a home, you have the choice of an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.

Interest rates usually fall early in a recession and then rise later as the economy recovers. This means that the adjustable rate for a loan taken out during a recession is likely to rise once the downturn ends. The fixed-rate loan at recession pricing could be a better deal in the long run.

While interest rates usually fall early in a recession, credit requirements are often stricter, making it challenging for some borrowers to qualify for the best interest rates and loans.

Consider the worst-case scenario: You lose your job and interest rates rise as the recession starts to abate. Your monthly payments go up, making it extremely difficult to keep current on the payments. Late payments and nonpayment lower your credit rating, making it more difficult to obtain a loan in the future.

A recession may be a good time to lock in a lower fixed rate on a mortgage refinance, if you qualify.However, be cautious about taking on new debt until you see signs that the economy is recovering.

3. Assuming New Debt

Taking on new debt—such as a car loan, home equity line of credit (HELOC), or student loan—need not be a problem in good times when you can make enough money to cover monthly payments and still save for retirement.

But when the economy takes a turn for the worse, your risks increase, including the risk that you will be laid off or lose business income. If that happens, you may have to take a job—or jobs—that pay less than your previous salary, which could eat into your ability to pay your debt.

Taking on new debt in a recession is risky and should be approached with caution. Pay cash if you can, or wait on big new purchases.

4. Taking Your Job for Granted

During an economic slowdown, even large corporations can come under financial pressure, leading them to look for cost cuts. All too often, that means layoffs.

Experiences in the technology industry in 2022 provide a reminder of how fragile employment can be in the face of an economic downturn. With the threat of recession looming, large tech companies made drastic workforce cuts. In November 2022, Facebook parent company Meta Platforms Inc. (META) parted ways with 11,000 employees, while Amazon.com Inc. (AMZN) announced that it would cut 10,000 jobs. For both companies, they were the largest layoffs in their histories.

Because jobs become so vulnerable during a recession, workers can’t take finding another one for granted, so it is wise to think carefully before leaving a job when the economy is in a rough patch.

In addition, older workers retiring during a recession could see their income decline and their retirement portfolio suffer just as they start to draw it down. If the economy is tumbling as you near retirement age, it’s important to weigh your options. You might even hang in there for another year or so.

5. Making Risky Investments

This tip applies to business owners. While you should always be thinking about the future and ways to grow your business, an economic slowdown may not be the best time to make risky bets.

Early on in a recession is not the time to stick your neck out. Later, once the economy starts to show signs of a sustainable recovery, it's time to start thinking big.

Especially avoid investment projects that would require you to take on new debt to finance.

Borrowing to add space or increase inventory may sound appealing—particularly since interest rates are likely to be low during a recession. But if business slows down more—as it may during a recession—you may struggle to make the payments.

Wait until interest rates just start to tick upward and leading economic indicators for your market or industry turn up.

What Is a Recession?

A recession is a meaningful and extensive downturn in economic activity.

A common definition holds that two consecutive quarters of decline ingross domestic product (GDP) constitute a recession.

In general, recessions bring decreased economic output, lower consumer demand, and higher unemployment.

What Are the Biggest Risks to Avoid During a Recession?

Many types of financial risks are heightened in a recession. This means that you’re better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.

A recession is no time to panic, but you should be conscious of the potential for layoffs in your industry and the likely difficulty in finding a new job if you end up unemployed.

If you own a business, it is best to avoid overextending yourself with risky new investments until the inevitable turnaround begins.

How Can I Protect My Investments During a Recession?

There is no surefire way to position your investment portfolio during a recession. In some cases—particularly if you have a longer investment horizon that will give your assets time to recover from any losses during the recession—you may benefit from leaving your portfolio alone. This keeps you invested in the markets and poised to gain from an eventual recovery.

If you decide to make some changes to your investment strategy in response to economic concerns, there are ways to reduce your risk. Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate.

Within the stock market, shares of large companies with solid cash flows and dividends tend to outperform in downturns.

The Bottom Line

There’s no need to panic in response to an economic slowdown, but you should pay extra attention to spending and be wary of taking unnecessary risks.

Even in the midst of a significant economic downturn, there are many positive steps you can take to improve your situation and recession-proof your life. These include adopting a realistic budget, establishing an emergency fund, and generating additional sources of income if necessary.

5 Things You Shouldn’t Do During a Recession (2024)


5 Things You Shouldn’t Do During a Recession? ›

Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.

What should you not do in a recession? ›

Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.

What always sells during a recession? ›

What are the best selling products during a recession? Items like personal hygiene, household items, pet food, diapers, food and beverages, and cleaning products all sell well during an economic recession. These items are either used frequently or are required for consumers to live happy, healthy lives.

What goes up the most during a recession? ›

Gold. Historically, during times of recession, the value of gold has sometimes increased. For example, in 1973 and 1974, the stock market fell 17.37% and 29.72%, respectively. But during those same years, the price of gold increased 73.49% and 67.04%.

Should I take my money out of the bank before a recession? ›

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

Should I hold cash during recession? ›

An emergency fund of six months will help you face potential financial hardships. In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.

Should I hold onto cash during a recession? ›

Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.

Where is your money safest during a recession? ›

Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.

Who suffers the most during a recession? ›

17951), co-authors Hilary Hoynes, Douglas Miller, and Jessamyn Schaller find that the impacts of the Great Recession (December 2007 to June 2009) have been greater for men, for black and Hispanic workers, for young workers, and for less educated workers than for others in the labor market.

Who benefits in a recession? ›

Declining stock prices during a recession also have the potential to benefit investors seeking income from dividends. As the price of a stock decreases, its dividend yield increases, generating higher returns for shareholders.

Is cash King during a recession? ›

For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.

Who will get hit the hardest in a recession? ›

As presented in this paper, data for both the current and previous financial crises reveals that young people are indeed hit hardest as reflected by rising unemployment rates, which persist long after the economy is growing again.

Can banks seize your money if economy fails? ›

In conclusion, banks cannot seize your money without your permission or a court order. However, there are scenarios where banks can freeze your account and hold your funds temporarily.

Where is the safest place to keep cash at home? ›

Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.

Is it better to have cash or money in bank during recession? ›

Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected.

Do things get cheaper during a recession? ›

During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments.

What should I do to make money in recession? ›

How do you thrive financially in recession? Some strategies to weather recessions include reducing living expenses, dipping into emergency funds, and developing passive income sources. You can also hone your skills, network, and start a new business.

What does a recession mean for the average person? ›

Economic expansions create opportunities: new businesses, more jobs, and higher wages. Recessions reduce opportunities: failed businesses, fewer jobs, and lower wages. Recessions normally don't happen every year, but they're not unusual.

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