How to survive a recession: A guide for making the most of your money during a difficult time

Rising interest rates and inflation (among other economic factors) are leading experts to predict a global recession on the horizon. You yourself might have even pondered how to survive a recession. As scary as it may seem, there are ways to protect your own personal finances. While no one knows for certain when the next recession might arrive, and how long it could last, below are best practices when it comes to surviving a recession.

What is a recession?

A recession is a period of two or more consecutive quarters where the economy shrinks rather than grows. This is called ‘negative growth.’ Recessions can be triggered by things like a sudden change in oil prices, or a crisis of confidence in the market.

Right now, it seems likely that we’ll enter a recession. While it’s hard to know for sure what’s going to happen economically in the coming months, there are a few things to keep in mind for maintaining financial balance throughout changing times.

What you can do

The first thing to do is to let go of any judgment you might have about the way you’ve handled money in the past. Don’t beat yourself up for not being prepared enough. Focus instead on what you can do now, today, to build up the financial habits that will help carry you through this upcoming period.

Truthfully, managing your money during a recession is very similar to managing your money in even the best bull market. It might be less fun during a recession, but the basic principles are all in place. There is no time like the present to check in with your financial habits and cultivate a sense of power and control of your financial life.

We’re breaking these habits down into three categories:

1. Managing debt

2. Making a plan for spending

3. Managing your savings and investments.

Many of these tips are good to practice all the time, but some are more specifically geared toward pulling through and surviving a recession.

During a recession, where cash flow might be tight and your goals could shift, it’s important to remember to practice patience and kindness with yourself. Let’s rip the proverbial bandaid off and start with the ugliest part.

How to handle debt in a recession

Everyone intuitively understands there are good debts and not-so-good debts to carry. Your mortgage, if you have one, is usually considered the best kind of debt. Credit card debt is definitely the bad kind.

In general, and especially during a recession, the quickest way to tackle debt is to minimize the most expensive debt first. Typically, that means credit card debt.

Credit Card debt

When thinking about how to survive a recession, paying off credit card debt (if possible), should be a main priority. Credit card debt is some of the most expensive debts out there. Each month, you’re charged around 20% interest on whatever balance you’re carrying. And if you have credit card debt, you’re not alone. The average credit card debt Canadians had in September 2022 was $2,121. That said, getting rid of credit card debt is a major priority.

The first thing to do to manage your credit card debt is look at your balance. If you’re paying interest every month, you can call your credit card company to see if you qualify for lowering the rate you’re paying. You can also try to negotiate a payment plan for paying off the balance. In the wake of the pandemic, many banking institutions are temporarily lowering the interest rates on credit card debt, though you may be asked to complete a financial review.

Depending on how much debt you’re carrying, it may be wise to see what your financial institution can offer you in terms of a personal line of credit or home equity loan. Transferring your debt load to an account with a much lower interest rate can create a little more breathing room for you to make payments and prioritize savings.

And of course, there is no time like the present to stop reaching for your credit card. You could even consider locking it. Try to switch recurring payments from your credit card to another account (Like your KOHO prepaid Mastercards, for example). Trying to get in the habit of using money you already have—rather than using credit—is always worth it.

Student debt

As already mentioned, you want to pay off your highest-interest debt first. If that happens to be your student loans, be sure to explore all of your options before committing to an ambitious repayment plan.

For example, did you know there are repayment assistance plans (RAPs) through the Canadian government? Additionally, depending on your income, you might even qualify for reduced payments or no payments at all. You can apply for repayment assistance as soon as you start to repay your student loans and anytime while in repayment. Though, the government has to approve you.

The Canadian Government has tips for repayment plans and information on how to address province-specific loans. Many schools also have financial aid services with support for alumni.

"Transferring your debt load to an account with a much lower interest rate can create a little more breathing room for you to make payments and prioritize savings."

Your mortgage, personal Line of Credit or Home Equity Line of Credit

Depending on which financial institution you’re working with, you might have more options than you think for figuring out payment terms. For the most part, financial institutions are following the lead of the Bank of Canada, which has significantly cut the policy interest rate. Call your financial institution to see if you’re getting the lowest possible interest rate on your debts, and to work out a manageable payment plan. It’s important to understand how you can protect yourself from rising interest rates.

Unmanageable debt

If debt has you completely snowed under, it can feel extremely scary. It’s psychologically taxing to walk around with that much financial strife. It’s hard, but it’s not hopeless. If you’re struggling to pay down the debt you’ve accumulated, take a peek at our guide for paying off your debt when it feels impossible.

How to spend your money in a recession

Especially if you’re living on a reduced income, it’s tempting to panic and start pinching every proverbial penny. With bills coming in, the fact that you need caloric sustenance to survive, and a place to live, it’s easy to feel squeezed in multiple directions.

But with a solid, flexible spending plan, and our ultimate budget template, you’ll be in a position to create a sense of control over your financial life. Having a plan keeps the ball in your court, letting you find the wiggle room to juggle things around if it’s necessary.

Being mindful about your expenses, alongside avoiding carrying high-interest debt, are the absolute best ways to weather a recession.

Create a spending plan

The first step to creating a spending plan is to look at your regular income. If you’re in the gig or freelance economy, or working with a variable income, you might consider averaging out how much you make per month and starting from there.

Look at what you’re taking in, and then look at the regular expenses you have. Things like rent or mortgage payments, your phone and internet bills, yes, but also things like your Netflix and Spotify subscriptions, anything you’re paying month to month. There are a lot of ways to build a spending plan—you can track your spending as loosely or tightly as you want, through a spreadsheet or through, for instance, KOHO’s categories. Most importantly, building habits to stick to your budget is integral to seeing results.

Things may get bad, and you might need to take on more debt. That’s normal, and absolutely not shameful. The most important thing you can do is focus on keeping your expenses under control, and try to avoid high interest debt.

"Being mindful about your expenses, alongside avoiding carrying high-interest debt, are the absolute best ways to weather a recession."

Paying your bills

When thinking about how to survive a recession, paying your bills probably comes to mind first. If possible, try to make timely minimum bill payments. If that’s not possible (and sometimes it’s not), it’s wise to call ahead and let whoever you’re paying know. In fact, some of the companies might be a little more flexible than usual on creating manageable payment plans. Many creditors will negotiate with you—it’s in their best interest to make it easy and possible for you to pay them, after all.

Paying yourself

Setting yourself up for the post-recession future comes down to paying yourself. Make sure your spending plan accounts for your savings and debt repayment commitments, even if you’re working with less than your ideal level of income. You can even make it automatic, with KOHO’s Goals and RoundUps.

How to save during a recession

No one can truly predict the future, but there are important things you can do to prepare for whatever is coming down the pipe. Recessions don’t last forever—that’s one of their defining features. The future holds many surprises, both the good and not so good kind. But setting yourself up to navigate uncharted waters will help you stay afloat, no matter what’s coming.

The biggest priority for your financial health depends on a few factors, like where you’re at in life (planning for your own university graduation looks a little different than planning for your kids to graduate, for example). But there are a few things to keep in mind for pretty much everyone, especially when planning how to survive a recession.

Slush fund

It’s always a good idea, but when the economy is less than bustling, it’s crucial to have a slush fund. When the proverbial rainy days come, having enough saved up to cover your expenses for a while is the best umbrella. That way, you can handle emergencies and difficulties without paying interest or taking on more debt.

Building up (and, potentially, rebuilding) your slush fund should be your top priority. Aim to stash away six months to a year of your day-to-day expenses —basics like your bills, groceries, and rent or your mortgage payments, yes, but also the fun stuff! You want to keep this money somewhere super accessible. While a high interest savings account might make sense, you definitely want to avoid storing an emergency fund in anything fixed term, and steer clear of accounts with cumbersome withdrawal penalties.

Automatic savings plans, like KOHO Goals, can make it super easy to save up your slush fund. Thus, putting your mind at ease when stressing about how to survive a recession.

For additional budgeting tips read: Should I change my budget during an economic downturn?

"Building up (and, potentially, rebuilding) your slush fund should be your top priority."

Longer term savings and investments

Recessions end. The economy will shift and change. If you’re in a position to continue contributing to your longer term savings goals, you should absolutely continue to do so. There will be a time when you’ll be glad you did so.

Yes, fluctuating interest rates might make savings less rewarding than during ideal circumstances, and a sluggish economy typically means lower initial returns on investments, try to remember that you’re playing a long game here. Tinkering with your portfolio to try and respond to every market dip and bump is a fool’s errand. It might feel satisfying to take action, but sometimes sitting it out is the wisest course.

If you’re concerned, it might be worth it to talk to your financial coach (KOHO Extra users get free coaching, just saying) or an investment adviser about your options. Given the economic fluctuations that accompany a recession and its recovery, it generally pays to play it cool, and to avoid rash decisions.

Remember, recessions end

Being mindful about your spending, saving, and debt management is the best strategy for coming out the other end of a recession with minimal damage to your financial health. Finding a sense of balance, even amid uncertainty, is a good skill to sharpen any old time.

When the recession ends, learning how to mindfully manage debt, work with a sound and flexible spending plan, and building up the habit of saving will pay off for the rest of your life. In the meantime, learning to be patient and kind with yourself as you fortify your financial habits is important.

Creating a sense of clarity around what you’re spending, what you’re saving, and being extra mindful about the costs of carrying debt are the best tools you have for achieving a sense of balance in your financial life, no matter what the market throws at you.