How to recession-proof your life

(CNN) — The United States is not in a recession, but the normal economic cycle means it will be at some point.

Exactly when is hard to predict. A nationwide recession is marked by a decline in economic activity over at least several months. Think lower consumer spending, higher job losses, tighter credit, sometimes a steep decline in stocks and often a gloomy mood on Main Street and Wall Street.

While you can never completely shield yourself from the negative effects of recessions (or even just a local or an industry downturn), you can focus on ways to mitigate them.

“It’s all about building financial resilience,” said Sheila Walsh, a certified financial planner who teaches at Georgetown University. “Preparation helps you to avoid making emotional decisions when times are more difficult.”

Step 1: Take a snapshot of your current financial situation

Figure out how much income you bring in every month and how much you spend.

Then break out how much you pay for essential expenses like housing, food, utilities and childcare. Do the same with what you spend on non-essential, lifestyle expenses (eg, eating out, gym memberships, entertainment, etc.)

The goal, Walsh said, is to “be aware of your cash flow: What’s coming in, what’s going out, what’s a need and what’s a want.”

If you’re regularly spending more than you take in, consider how you make up the difference, whether that’s pulling from savings or using credit cards.

“Get clear on your money habits and patterns,” she said.

Step 2: Get rid of credit card debt

With an average interest rate nearing 20%, carrying credit card debt is an albatross, so consider ways to pay it off sooner rather than later.

One option: Look at your discretionary spending and decide what can be cut. For instance, you’ll free up cash if you stop spending on things you don’t enjoy that much – or, in the case of subscriptions and streaming services, have forgotten about or rarely use.

Also, try this credit card payoff calculator to see how much you might save if you either take out a personal loan at a lower interest rate or move your debt to a balance transfer card, which lets you pay down your debt interest-free for up to 18 months.

Walsh recommends checking your credit report and credit score, too. That lets you see if there are any errors that need correcting on your report and gives you a better sense of how to improve your score.

A higher score can mean getting more favorable loan terms when you need more credit.

Step 3: Build an emergency fund

The standard advice is to have three to six months’ worth of essential living expenses in a liquid, high-yield savings account.

But how much to have at the ready depends on your personal needs and preferences, Walsh said.

For example, you may want to sock away more if:

• You’re the sole breadwinner for your family.
• You and your spouse both work in the same industry and are equally at risk for layoffs.
• You don’t anticipate getting much severance if you lose your job.

As with paying off credit card debt, see where you can cut back in discretionary spending to free up some cash for emergencies.

Building a sufficient rainy day fund can be difficult. If yours falls short and you own your home, you might consider taking out a home equity line of credit as a break-the-glass backstop.

The interest rate you’ll be charged if you borrow money from a HELOC will depend on your credit score. For reference, the average variable rate on a $30,000 loan was 7.26% in early May for someone with a 700 FICO score, according to Bankrate.

When evaluating a lender’s offer for a HELOC, examine all the potential costs, said Bankrate analyst and certified financial planner Stephen Kates. That includes closing costs, minimum withdrawal requirements, annual fees or inactivity fees.

Step 4: Review your employee benefits and possible severance

If you’re concerned about being laid off, make the most of your employer-subsidized benefits now, Walsh recommended. Why? Because the things you have to do or want to do will likely be more expensive after you separate from the company.

So get the medical care you’ve put off, take that professional certification course or use your employer discounts for goods and services.

Likewise, save at least enough in your workplace retirement plan to get the full matching contribution from your employer.

And for planning purposes, check your employer’s severance policy to see how much pay you might get in a layoff. Similarly, check what you might get from state unemployment benefits.

Step 5: Have financial options if you’re near retirement

If you plan to retire within five years, now is the time to maximize your options in case a recession hits and stocks fall, said certified financial planner Nicholas Covyeau, founder of the fee-only planning firm Swell Financial.

Best case scenario: You keep your job during the downturn, so you can continue saving and, if need be, postpone retirement until your nest egg recovers.

Worst case scenario: You’re laid off.

In both cases – but especially if a layoff forces you into early retirement – Covyeau recommends having a six-month emergency fund plus a nest egg that can produce five to seven years’ worth of living expenses just from the fixed income portion of your portfolio alone.

Here is how he suggests investing those living expenses: One to three years’ worth should be in cash instruments, like a money market fund; the rest can be in bonds and certificates of deposit of varying durations. When you need to take money from your portfolio, tap the cash investments first.

“The goal is to never be forced into selling stocks in a down market,” Covyeau said. (Here’s why doing so can increase your chances of outliving your money.)

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