Editor’s note: This story was originally published here penny hoarder.
Recession can wreak havoc on your finances. So it’s understandable if you’re concerned by recent headlines.
Economists are becoming increasingly pessimistic amid tariffs that could push prices higher. Companies and the government are cutting jobs, due to which unemployment has increased.
If you’re worried about a recession, there are some steps you can take to protect your money. But you’re probably facing some tough choices because your paycheck will only last so long.
A Big Decision: Should you save money to prepare for a recession or pay down debt?
Saving vs. Paying Off Debt Before a Recession
There is no hard and fast rule that dictates whether you should save or pay down debt when you’re concerned that a recession is imminent.
Often, the best move is to split any extra money you have in your budget between increasing your savings and reducing debt.
building your emergency fund
Financial planners usually recommend six months emergency fundBut this is just a general rule. The exact number you should aim for depends on your individual circumstances.
For example, if you’re young and healthy and you work in a field that’s relatively untouched by layoffs, such as health care or education, you may be able to survive three months of salary.
A large emergency fund has some obvious benefits: It gives you more time to find a job if you are laid off.
You will also be less likely to need to invest early on your retirement funds to meet your short-term needs. Doing this can be expensive, not only because of taxes and penalties, but also because you may be selling the investment when it is low.
keep bills down
Of course, if you’re affected by the recession, you’ll want your bills to be as low as possible. Paying off debt will free up money in your monthly budget and save you money on interest.
If you’re paying by credit card, your savings will be especially significant when looking at the average annual percentage rate (APR) was above 21% till February 2026.
But here are some situations when you might want to prioritize savings over debt repayment, or vice versa.
When it makes sense to save more
Consider making savings your top goal in the following situations — but definitely keep making minimum debt payments.
- You don’t have savings for at least three months. Although a six-month emergency fund or even a 12-month emergency fund is considered the gold standard in some cases, it takes time to build this level of savings. At a minimum, aim for a three-month emergency fund. If you are laid off, that financial aid will give you time to apply for new jobs and make your way through the hiring process.
- You’re worried that you’re going to lose your job. If your company has announced layoffs Or freeze renting, you may want to double down on savings for now. The same applies if you work in a sector that’s particularly sensitive to economic downturns, such as hospitality, real estate or retail.
- You don’t have high interest debt. In the best case scenario, you only have low-interest debt, such as a mortgage, car payment or federal student loans. In that case, you may want to focus on increasing your savings to a level you are comfortable with.
When paying off debt makes more sense
If these circumstances apply it may make sense to pay off debt before saving more money.
- You are already behind on payments. If you’ve fallen behind on bills, saving money before you get caught up is your top priority. It is often very difficult to get a loan during a recession. A recession will be even more painful if you’ve damaged your credit score.
- You have credit card debt. Because there are excessive interest rates on credit cards and the interest rates are increasing, which is resulting in credit card debt This is usually a smart move once you have three to six months of an emergency fund.
- You are comfortable with your savings level. If you have a good emergency fund and you think your job is secure, go ahead and pay off the debt, if you prefer small expenses rather than a large bank balance.