Facing a potential recession is scary, especially for people with lower incomes. However, there are strategies to limit financial exposures and seize opportunities. There are also viable strategies for low-income earners to increase their economic and financial resilience in the face of a potential downturn or recession.
Recession Risks Are Elevated
Recession risks are elevated for the U.S. economy due to high interest rates and tariff policy uncertainty, which have weighed sharply on business and consumer confidence. Recent U.S. economic growth data have weakened, sending the Atlanta Fed’s GDPNow into negative territory, reflecting the potential for a -2.4% gross domestic product growth rate for Q1 2025 based on data available through March 6. This is a worrisome data point, although GDPNow estimates are highly sensitive to new economic data and subject to significant revisions.
According to the National Bureau of Economic Research, recessions are “contractions in economic activity [that]
start in the month after a peak in the business cycle and end in the month of the trough.” For the non-economist, recessions are times when economic growth falls, people spend less, businesses hire fewer people, and equity markets usually fall. In short, it’s a time when people have less money to spend, and economic fear impacts their decisions.
Where To Cut Back In A Recession
Cutting back on discretionary spending is a tried and true strategy for businesses when a downturn seems imminent. Of course, it’s also a valid strategy for individuals as well. Optional, unnecessary, and especially frivolous spending should be sharply curtailed.
On the downside, if enough people and businesses curtail their spending, the pullback on consumption can contribute to a slowdown, making a recession more likely—and even more severe.
Recessions are not just typified by falling growth; they can also be deflationary because a slowdown is when individuals and companies cut back on expenses, especially discretionary spending. This drop in demand can incentivize businesses to cut prices, leading to deflation or at least disinflation. This downward pressure on prices can also make deferring unnecessary purchases a high-value strategy.
The Case To Reduce High-Interest Debt In A Recession
Having debt limits personal freedom reduces one’s ability to be picky about jobs or ways to earn income, and can contribute significantly to financial stress in an economic downturn. On the upside, not all debt is bad, and many forms of debt can contribute to long-term wealth creation, like mortgage debt. However, credit card debt is usually subject to very high interest rates and can be a budget killer without any upside wealth-creation potential.
Looking at recent economic data, the bad news is that credit card limits and balances are currently at record highs. Recent data from the New York Fed show that Q4 2024 credit card limits were at a record $5.08 trillion, while credit card balances were at a record $1.21 trillion. The good news for the economy, as it pertains to debt, is that in Q4 2024, only 3.6% of all consumer debt was delinquent, which would have been a record-low percentage prior to the Covid-19 pandemic.
Even in good times, credit card debt can be a burden, but it can swiftly become unmanageable in a recession. Paying down credit card debt is always a good idea, but it’s an especially good strategy in a downturn to minimize financial risks.
Careful And Cautious Investing In A Recession
Along with cutting back on non-discretionary spending and reducing high-interest debt, investors should not try to time a falling market, nor should they invest more than they can afford to lose.
Investors should always live by the mantra buy low and sell high. Unfortunately, in falling markets, investors often get scared, selling at low points, making them miss out on the potential to capture a future recovery. The potential for investors to get spooked and sell their investments at an inopportune time is an elevated risk if the potential for a recession is high because money can get tight in a recession, prompting investors to sell out of fear or need.
An impactful way to mitigate this risk is by only investing money you can afford to lose. This is always a good recommendation, but it becomes more crucial in times of weakness. While buying the dip may be tempting, it is critical to ensure that the money used for investments can remain in equity market investments for the medium or long term.
Maintaining financial resilience depends on having some kind of nest egg or keeping investments in low-risk investments that are liquid and can be easily accessed. Otherwise, if emergency funds are placed in risky or illiquid assets, financial needs can push exposed investors to sell investments at a loss.
Lower-Income Families Should Focus On Boosting Earned Income In A Recession
In addition to following the advice above, lower-income families should prioritize investing in education, which could turn into higher-paying jobs relatively quickly. After all, lower-income families usually derive their most significant financial benefits from earned income.
Jobs in healthcare, the trades, commercial trucking, and a few other key sectors have significant labor needs and present significant outsized income opportunities in a relatively short period of time for a relatively small investment.
Relocating to lower-cost areas with more economic opportunities and lower unemployment rates can also present more earned income opportunities.
Lowering costs and increasing income potential are solid strategies anytime. In a recession, they are most critical for bolstering individual and household resilience. Plus, according to data from the U.S. Bureau of Labor Statistics, higher levels of educational attainment not only increase the potential for earnings but also reduce the likelihood of unemployment. This reality is true not just for lower-income earners but across the entire economy.
Risks Of A Recession
There are significant risks to the economic outlook from trade policy and tariff risks, and Prestige Economics has repeatedly acknowledged the potential negative impacts and risks for the growth outlook and financial markets.
Fortunately, while recent economic headlines have been dominated by talk of recession, a recession is not inevitable.
Even if a recession does not happen, preparing for a recession is always a sound strategy. Moreover, proper planning for a recession can help anyone become recession-proof because there are many ways to find the upside in a downturn or a recession.