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How to recession-proof your savings

Posted by Unes on December 22, 2024
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Key Takeaways

  • Recession-proofing your savings means devising a strategy to offset possible income loss and increase your income if you're lucky enough to leave your savings intact during a downturn.
  • Building an emergency fund and paying down debt is one of the best ways to protect your savings from recession.
  • Reviewing your investments before a recession can help you properly diversify your retirement savings.
  • High-yield savings accounts, money market accounts, certificates of deposit (CDs), and government bonds can all play a role in your savings strategy.
  • Cutting back on household expenses can help you keep more of your money during a recession.

How the Recession Affects Your Savings

A recession can take a toll on your savings. If you lose your job, you'll probably have to dip into your savings to pay your bills. Even if you keep your job, the value of your investments and any amount you normally earn from them may decline.

Because stock prices can fall during a recession. The widely followed S&P 500 stock index has fallen an average of 6.4% during a U.S. recession since 1929, according to data published by global investment manager Schroders.

In fact, S&P returns fell more than 80% during the Great Depression and more than 37% during the Great Recession (although if you exclude these periods, the index actually rose an average of 1.8% during severe economic downturns. The 1920s end).

What to do before recession

Before and during a recession, you can take steps to shore up your savings rather than stand by and hope for the best. Here are four steps you can take during a recession to make sure you have a nest egg you can count on when you hit it.

Build Emergency Savings

If you don't already have one, creating one should be your top priority. A majority of CPA financial planners who responded to the 2020 survey said they believe this is the most important thing Americans can do to prepare for a severe economic downturn.

“It's a good idea to have some savings, especially for emergencies,” Alex Caswell, chartered finance and certified financial planner with RHS Financial, told The Balance via email. “It can help you cope with unexpected expenses, such as job loss or unexpected medical bills. Aim to save enough to cover at least three to six months of living expenses.”

Important

A high-yield savings account is one of the best places to keep your emergency fund because you can easily access the money when you need it. These accounts pay higher rates than savings accounts at traditional banks and are sometimes only available online.

An emergency fund that can cover six months of living expenses is appropriate for most people, said Caleb Tucker, chartered financial analyst, director of portfolio strategy at Merit Financial Advisors.

“For some people, especially retirees, more emergency savings should be held either in cash or in very short-term, cash-like investments,” Tucker told The Balance via email. “(a) You want to have enough savings so you don't have to turn to investments or other assets to pay the bills in the event of a job loss or a large unexpected expense.”

Review your investments

For many people, retirement savings are tied to investments in the stock and bond markets. Caswell recommends reviewing your investments to see where you can diversify to cushion those investments from market volatility.

“Consider spreading your money across different types of investments, such as stocks, bonds, real estate, inflation-protected Treasuries and commodities,” he said.

Which stocks should you consider? Look at stocks in the healthcare, utilities and consumer staples sectors. Although consumers generally cut back on spending during a recession, they still need health care, electricity and other utilities, and consumer goods such as food.

When considering your investments, consider factors such as your risk tolerance and your retirement horizon. The closer you are to retirement with your investments.

Reduce debt

Pay off high-interest debt, such as credit card bills, to save on interest payments and save money that you may need during a recession.

“By paying off debt,” Caswell said, “you'll free up more money to save or invest.

It's especially important to get credit card debt under control because it has double-digit interest rates higher than many other types of debt.

If you're dealing with a large amount of high-interest debt, consider a debt consolidation loan with a lower overall interest rate or a balance transfer credit card with a 0% introductory APR.

Keep Other Savings in High Yield Cars

Once you have an emergency fund, you may want to remove any other savings from a savings account that pays a higher interest rate, such as a certificate of deposit (CD) or .

Warning

You'll want to use CDs for money you don't need right away, because you usually can't withdraw your money before the CD expires without penalty. If you are expecting a longer recession, you might consider creating a CD that contains CDs with different duration lengths, such as three months, six months, and one year.

Government bonds are another option for long-term savings. They may have better rates than CDs or MMAs, but also lock in your money for longer. William Bevins, a certified financial planner and fiduciary advisor in Franklin, Tennessee, recommends investing in cash or Treasury bills to recession-proof your savings.

Series I savings bonds, also known as I bonds, are available from the US Treasury Department and are designed to protect against inflation. Bond I pays both a fixed interest rate and an interest rate adjusted for inflation. The department sets the inflation-adjusted rate twice a year.

it comes in terms ranging from four weeks to 52 weeks. When you receive a DFI, you are giving the federal government a loan to cover its debts and expenses.

The Treasury Department sells these bills at a discount. At maturity, you receive the full face value, plus what you paid at the discounted rate. Because they are backed by the federal government, FDIs are considered some of the safest investments available.

What to do in a recession

When a recession hits, there are steps you can take to make sure your savings don't disappear overnight.

Cut costs

Look for ways to earn as much money as possible. For example, consider cooking at home instead of eating out, canceling unused subscriptions (like summer services and gym memberships), and shopping around for deals on everything from groceries to car insurance.

Need help cutting costs? Create a household with the help of a or a. Once you set a budget, make sure you stick to it.

Negotiate Your Accounts

As part of your cost-cutting efforts, connect with your monthly billing service providers. For example, you can find out if your internet service provider offers a cheaper plan or if your home insurance company gives you offers that you don't take advantage of.

If you can't get discounts, rebates or better rates from your current service providers, check if they have competitors with lower rates or promotional offers.

Delay large purchases

If you're looking for a new couch or car, consider putting off the purchase. If possible, you'll want to save this money to top up your emergency fund or pay off more debt. If you really must buy it now, look into buying a used sofa or replacement as it is usually cheaper.

What to tell yourself if things go wrong

A recession can wreak havoc on your finances. But remember that recessions don't last forever. At some point, the economic sky will change from stormy to sunny. In fact, the average recession since 1980 has lasted less than 10 months.

To avoid recession, stick to this mantra: keep saving. Having more cash on hand can stabilize your finances during an economic downturn.

You will need discipline, commitment and if you want to save money. However, once you start creating a habit, you will have created a habit that will make it easier to set aside money each month or pay period.

Frequently Asked Questions (FAQ)

Where to keep money during a recession?

There is nowhere to store your savings during a recession. However, you'll definitely want to consider starting or adding to an emergency fund that can cover about three to six months of your household expenses. Keeping that emergency fund in a high-yield savings account is smart, giving you quick access to your money and earning it healthy interest.

Is saving good during a recession?

Saving is always a good idea, as it should be financially. But it's even more important during a recession because you're more likely to lose your job or cut back on your hours.

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