Recession-proofing your finances is devising a plan to weather a potential loss of income while maximizing your return if you are fortunate enough to keep your investments untouched during the recession.
Building an emergency fund and cutting down debt are two of the best methods to protect your savings during a recession.
A pre-recession evaluation of your investments can guarantee that your retirement savings are adequately diversified.
High-yield savings accounts, money market accounts, CDs, and government bonds can all contribute to your savings strategy.
Cutting household spending can help you keep more of your money during a recession.
How Will a Recession Affect Your Savings?
During a recession, your savings may suffer. Even if you keep your employment, the value of your investments and the amount of passive income you generally generate from them may decline.
According to Schroders, a worldwide financial management, the widely followed S&P 500 stock index has fallen an average of 6.4% .
returns plunged more than 80%, and during the Great Recession, they lost more than 37% (however, if both years are excluded, the index actually moved up an average of 1.8% throughout significant economic downturns since the late 1920s).1
What Should You Do Before a Recession?
Before and during a recession, you can take steps to strengthen your savings rather than simply waiting and hoping for the best. Here are four steps you can take when a recession is on the horizon.
Amass Emergency Funds
If you don’t already have one, making one should be your first priority.
“This can assist you in weathering unexpected expenses.” Save enough money to cover three to six months of living expenditures.”3
Important
A high-yield savings account is one of the finest places to maintain your emergency fund because it is immediately accessible when needed. These accounts give greater interest rates than typical bank savings accounts and are often only available online.
Most people should have a six-month emergency fund, according to Caleb Tucker, director of portfolio planning at Merit Financial Advisors and a chartered financial analyst.
Examine Your Investments
Many people’s retirement funds are invested in the stock and bond markets. Caswell suggests reviewing your investments to determine where you can diversify to protect them from market volatility.
“Think about diversifying your investments. commodities,” he advised.
Which stocks should you look into? Examine stocks in the health care, utility, and consumer goods industries. Despite the fact that consumers often reduce their spending during a recession, they still require health care, energy and other utilities, and consumer products such as food.
Consider criteria such as your risk tolerance and your retirement time horizon as you go through your investments. The closer you get to retirement, the more conservative you should be with your money.
Debt Reduction
Pay your high debts to save money on interest costs and to save money you might need during a recession.
“By paying off your debt,” Caswell explained, “you’ll have more money to put into savings or investments.”
Credit card debt, in particular, is critical to manage because the typical credit card interest rate is in the double digits, which is greater than rates on many other types of debt.
If you have a lot of high-interest debt, think about getting a debt consolidation loan with a reduced interest rate.
Other savings should be invested in higher-yielding vehicles.
Once you’ve established your emergency fund, consider putting any remaining funds in an account that provides a greater interest.
Warning
You should use CDs for money you don’t expect to need right away because you can’t normally remove it without penalty until the CD period expires. If you anticipate a longer-term decline, consider constructing a CD ladder comprised of CDs with varied term durations, such as three months, six months, and one year.
Another alternative for long-term savings is government bonds. They may offer better rates than CDs or MMAs, but they also lock up your money for a longer period of time.
Series I savings bonds, often known as I bonds, are issued by the United States Treasury Department and are intended to safeguard against inflation. An I bond pays both a fixed and an inflation-adjusted interest rate. The inflation-adjusted rate is decided by the department twice a year.6
Treasury bills have maturities ranging from four to 52 weeks. When you purchase a T-bill, you are essentially lending the federal government money to cover its debts and expenses.7
These bills are sold at a discount by the Treasury Department. When a bill matures, you receive the full face value, which is greater than the discounted rate you paid. T-bills are considered some of the safest investments available because they are backed by the federal government.
What Should You Do During a Recession?
When a recession occurs, there are steps you can take to ensure that your savings don’t vanish overnight.
Reduce Expenses
Look for ways to decrease costs in order to keep as much money as possible. Consider cooking at home instead of eating out, canceling unwanted subscriptions (such as streaming services and gym memberships), and shopping around for the best discounts on everything from groceries to vehicle insurance.
Do you need assistance cutting costs? Make a household budget using a budgeting spreadsheet or a budgeting app. Once you’ve established a budget, make sure you stick to it.
Dispute Your Bills
Contact monthly payment service providers as part of your cost-cutting efforts. For example, you could discover whether your internet service provider has a lower-cost plan or whether your house insurance company offers discounts that you are not taking advantage of.
If you are unable to obtain discounts, rebates, or better rates from your present service providers, examine if they have a competitor offering lower rates or promotional offers.
Postpone Large Purchases
Consider whether you can postpone the purchase of a new sofa or a car. If at all possible, preserve that money to add to your emergency fund or pay off more debt. If you truly need it now, consider buying a secondhand sofa or car instead, which are usually less expensive.
What You Should Tell Yourself If Things Go Wrong
A recession can cause financial havoc. But keep in mind that recessions do not persist forever. At some point, the economic clouds will clear and the sun will shine. Since 1980, the average recession has lasted fewer than ten months.8
Stick to this slogan to help you get through a recession: Keep saving. Having more money at your disposal can help to stabilize your finances during a recession.
If you want to save money, you’ll need discipline, determination, and a strategy that you stick to. However, once you’ve started a savings routine, you’ll have formed a habit that should make it easy to set money down each month or pay period.
FAQs (Frequently Asked Questions)
During a recession, where should I put my money?
During a recession, there is no one place to keep your savings. However, you should seriously consider building or adding to an emergency fund that can cover three to six months of your family needs. It’s a good idea to put your emergency funds in a high-yield savings account, where you can access it quickly while generating a decent interest rate.
Is it wise to save during a recession?
Saving money is always a smart idea since you should be financially prepared for the unexpected. However, it is especially critical during a recession because you are more likely to lose your job or have your working hours reduced.