A financial planner says there's no real way to 'recession-proof' your money, but 3 steps can prepare you for whatever happens next

Courtesy of Brian Face

Brian Face, CFP.

• A financial planner says there's no foolproof way to "recession-proof" your finances, but establishing a solid base now will put you in a better place should a recession (or other financial setback) come to pass.
• He recommends starting by saving a substantial cash emergency fund in a high-yield savings account, understanding your spending habits and where you could cut back if you needed to, and establishing your long-term investing strategy now, so you can stick to it.
• SmartAsset's free tool can help you find the right financial planner to create your own financial plan »

Are you concerned by reports of a looming recession, and wondering what you should do with your finances to prepare?

"There is no real way to recession-proof your finances," financial planner Brian Face tells me, "but there are ways to make sure that you have a solid base to make it through the storm when a recession comes."

"When we think of recessions, we think about our economy from a big picture: a recession is defined as decline of GDP in two successive quarters," he continues. But when it comes to making plans, "I think we should also think of a recession on a personal level … something like losing your job or getting sick."

Face said there are three main areas to focus on when recession-proofing your finances, each of which plays an important role in financial planning: saving, spending, and investing.

1. Save when times are good

"When times are good, this is when we should focus on building up our three to six months of living expenses," in an emergency fund, Face says. "Put this in a savings account that is not to be touched except in an emergency. I have mine in a high yield savings account that earns more interest."

If you struggle to avoid the temptation to touch your savings, consider putting it in an account somewhere other than your primary bank. "I have also noticed if we keep the money in an account we don't see every day, that can help us avoid wanting to spend the money," Face says. Several online banks and credit unions offer interest rates much higher than your average checking account, including Ally Bank, which is a favorite among financial planners.

And if you feel like you don't have enough income to build up an emergency fund, now is a great time to look for other sources of income - having multiple income streams will not only help you build up your savings now, but also reduces your risk if a recession results in cut hours or a lost job.

2. Understand your spending habits

When it comes to spending habits, the preparation is more psychological than financial. "Spending during good times is great, but we should understand what we are spending and how we will need to change those habits when a recession comes in our life," Face says. "I tell clients look at the areas of your spending that you don't receive as much joy in. Many times we find we are spending a lot on things that really don't make us happier a week later."

Research finds that spending money on time-saving services, small pleasures, charitable giving, and experiences brings more happiness to your life than other types of spending. Thinking about your spending habits and trying to use your money on things that bring you long-term happiness will not only make you feel better, but will also help you make decisions about what kinds of spending to eliminate when a recession hits.

Step 3. Set up your long-term investing strategy now

During a recession, your 401(k) or other retirement accounts will be the most talked-about, but it's best to make any changes now rather than after a recession hits.

"The first step to take is to make sure you have the proper investment allocation for your risk tolerance and goals" Face says. "Make sure to rebalance your accounts so your allocation is properly diversified. And if you are unsure how to invest, I recommend taking a look at your target date options."

Target date funds are a convenient way to set up your portfolio and forget about it - you choose a fund tied to the year you want to retire, and the fund managers will automatically rebalance your investment over time so that it becomes more conservative as you get closer to retiring. If the idea of adjusting your investments according to your risk tolerance sounds complicated or intimidating, a financial planner would be able to help.

While you're at it, also make sure that if your employer offers to match your retirement contributions, you're enrolled in that program. Many companies encourage employees to save for retirement by matching your retirement contributions up to a percentage of your paycheck (usually about 3% to 5%). That's money that is not only free, but doesn't depend on the performance of the markets or the economy as a whole - and will help strengthen your investment portfolio for decades to come.

Once you've made sure your investments are allocated the way you want them to be, forgetting about it is exactly the thing to do, Face says. "If you are worried about recession after 10 years of growth in the stock market, I recommend lowering your risk level but not moving your investment out of the market. Timing the market almost never works out."

SmartAsset's free tool can help you find the right financial planner to create your own financial plan »

• More savings and retirement coverage
• How to retire early
• The best high-yield savings accounts right now
• The banks with the best CD rates
• When to save money in high-yield savings

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