Consider these 5 financial moves to prepare yourself for a possible recession in 2023 (2024)

If 2022 was the year of resurgent inflation, 2023 could be the year of recession — or at least a bumpy landing.

The economy still hasn’t rolled over, and might not, but plenty of warning signs are flashing.

Thus, it's a good idea to prepare. Here are some suggestions for doing that in case an economic downturn arrives:

1. Keep debts under control

This is wise advice at all times, but borrowing can create greater risks during recessions if you lose a job, suffer a big investment loss or face other economic pressures.

There are a couple of approaches to paying down debt. One stresses paying off small balances first to build momentum — a feeling that you’re making progress. Another focuses on first whittling away at those obligations carrying the highest interest rates.

“Minimizing your interest costs means paying off the debts from highest interest rate to lowest, but you have to do what works for you," said Greg McBride, chief financial analyst at Bankrate.com. "If you’re more likely to stick with the program by paying off a few smaller balances first to build some momentum, then do that."

He also suggests looking for incentives such as 0% balance-transfer offers, some of which last up to 21 months, if you can't pay off your credit cards in full each month.

2. Review your tolerance for losses

Investments typically decline during recessions, at least during the early phases. With a whiff of recession in the air, many assets faltered last year, from home prices to stock and bond values to cryptocurrencies.

The stock market, as represented by the Standard & Poor’s 500 index, slumped around 19% last year. A second straight annual decline of that magnitude would be unusual. Nor do stocks and bonds usually tumble in unison, as happened in 2022.

Rather, the stock market tends to recover from drops, even amid recessions. Following 18 prior down years dating to 1950, the S&P 500 index bounced back in 15 of the following years, according to research by LPL Financial. "Looking at this another way, after losing 20% or more at any point in time, the S&P 500has gained an average of 17.6% over the subsequent 12 months," LPL Financial said.

The stock market finished 2020 with a loss of 19% but was down 25% at the nadir.

At any rate, a new year is a good time to rebalance or shift some money from relatively stable holdings to those that got beaten down. The idea here is to make gradual adjustments. Your portfolio should reflect your ability to tolerate or handle risk, but you want to avoid making drastic changes at what could be near cyclical low points.

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3. Build up your liquidity

Recessions can strain finances, and that’s why it’s critical to have enough money in savings to meet unexpected expenses. The usual advice of having three to six months of emergency savings on hand rises to six to nine months for recessionary periods.

“Having less debt and more savings will better enable you to weather whatever economic environment may lie ahead," McBride said.

Candy Valentino, a Paradise Valley entrepreneur and author of the personal-finance book "Wealth Habits," suggests going through your credit card and other account statements once a month with the aim of cutting expenses by 10%. Watch for subscriptions or memberships that you signed up for but no longer use, frivolous phone apps that cost a few dollars, excessive restaurant meals and other entertainment costs.

"Go line by line and look at your credit- and debit-card bills," she said. "It's amazing how many charges can sneak up on you."

It’s also a good time to check your credit reports for errors and to review the various loans in your name, including credit card accounts you might have forgotten about. A solid credit history will translate into higher credit scores and the ability to get loans on good terms, should the need arise.

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4. Re-evaluate your job prospects

Unemployment usually rises during recessions, and this is the factor that typically causes the most misery. So far, though, that isn’t happening, much to the consternation of Federal Reserve leaders who want to flatten inflation in part by pushing up the jobless rate. But if a recession arrives, unemployment likely will increase.

Along with possibly searching for a new job, it might be time to update your resume and improve employment skills. It also could help to add a second or gig job. In addition to extra income, a side job can open up tax-saving opportunities such as deductions for business meals, transportation, a computer, supplies or a home office, said Valentino.

Despite a persistently low unemployment rate and ample openings, employees and job seekers shouldn't get overconfident. Bill Adams, chief economist at Comerica Bank, notes that the quality of job openings has declined, with layoffs rising in higher-paying industries including technology, finance and manufacturing while hiring continues in lower-paying fields such as leisure and hospitality.

He sees the nation's jobless rate rising to 4.5% by mid-2023, from 3.5% currently.

5. Delay retirement if you can

If you’re nearing retirement age, it might pay to hold out for another year or two. Granted, it seems like everyone else is quitting or retiring, but staying employed a while longer can help take some strain off of your retirement portfolio, especially during a recession.

“A few additional years in the labor force can make a big difference,” noted the Center for Retirement Research at Boston College in a report that cited three key benefits. The first: Contributing more money into a 401(k) or similar retirement plan. The second: Further delaying Social Security for people between the ages of 62 and 70, with a corresponding bump up in eventual benefits. The third: Reducing the number of years in retirement that your portfolio will need to last.

The last point is worth emphasizing during recessionary periods when financial markets often are in disarray.

One Vanguard Group study looked at the results for two investors with hypothetical $500,000 portfolios at the start of the severe, recession-induced 1973-1974 bear market. Both investors withdrew $25,000 a year and had similar portfolios split 50-50 between stocks and bonds. But one investor began withdrawals in 1973, at the start of a 21-month stretch when the market slumped 46%. The other began one year later in 1974. The delay was critical, as the first investor ran out of money after 23 years while the second still had some assets left after 35 years.

This is known as sequence-of-return risk, and it reflects the danger of turning temporary paper losses into permanent setbacks from which it can take many years to recover. Recessions are a time when that danger rises.

Reach the writer at russ.wiles@arizonarepublic.com.