5 Things You Shouldn’t Do During a Recession

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 can impair your personal finances. Being prepared and taking a few simple steps to reduce your risks can help you weather the economic storm.

Below are some of the financial risks that everyone should avoid taking during a recession. 

Becoming a Co-signer

Co-signing a loan can be a very risky commitment even in flush economic times. If the borrower does not make the required payments, the co-signer might have 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.

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, it may even be preferable to assist with a down payment or make a personal loan rather than leaving yourself on the hook for the co-signed loan.

Getting an Adjustable-Rate Mortgage (ARM)

When purchasing a home, you may choose to take out an adjustable-rate mortgage (ARM). In some cases, this move makes sense (as long as interest rates are low, the monthly payment will stay low as well). Interest rates usually fall early in a recession, then rise later as the economy recovers. This means that the adjustable rate for a loan taken out during a recession is more likely to rise once the downturn ends.

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 can lower your credit rating, making it more difficult to obtain a loan in the future.

Instead, assuming you have decent credit, 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.

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, 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.

In short, if you are considering adding debt to your financial equation, understand that this could complicate your financial situation if your income declines. 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.

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, marking the largest layoffs in the history of both companies.

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.

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, is the time to start thinking big. 

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 not be able to make interest payments on time. Wait until interest rates just start to tick upward and leading economic indicators for your market or industry turn up.

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.