How to Protect Your Emergency Savings in a Recession

Rumblings about a recession have been getting louder. As of summer 2022, chances of a recession are increasing enough that if these were storm clouds, we’d grab an umbrella.

In financial terms, that umbrella is your family’s emergency fund. If you’re worried about what a recession could mean for your family, this is a great time to do what you can to get prepared. 

Here’s what to expect from a recession, how to get your savings in order—and why a recession can even have a silver lining.

What Is a Recession?

There isn’t an official definition of a recession, but a common working definition is two quarters of economic downturn in a row. Economists generally measure this via gross domestic product (GDP). 

While a big-picture definition is useful to understand, families like mine (and maybe yours) are much more concerned with, “What does a recession mean for me and my loved ones?” So, when the economy contracts for a sustained amount of time and goes into recession, that typically comes with consequences like:

• Business sales are down

• Layoffs increase (because businesses try to balance their loss of income by reducing their labor force)

• Consumer spending goes down (because more people are out of work and cutting costs)

• Standard of living falls, which is hardest on people already struggling to make ends meet

• Inflation may go down

• House prices can drop

A recession can be a stressful time, but it doesn’t mean you need to panic about your finances just yet. For one, recessions are fairly common and often don’t last long. The COVID-19-related recession in 2020 only lasted about two months and the average recession lasts about six to 12 months. A recession can also come with some silver linings, such as lower inflation, which has also been a financial strain on many families and their emergency funds.

How a Recession Can Hurt (or Help) Your Finances

A recession doesn’t treat every family the same. Your job and financial health play a major role in how secure you’ll feel in a recession and how much of a cushion you have, if needed. Some people face real hardship in a recession, while others may even find surprising upsides.

Recession downsides

One of the biggest concerns for many families is that recessions and job losses often go hand in hand. Although the current unemployment rate is 3.6 percent, which is historically very low, an economic downturn could trigger an increase in layoffs. You know the details of the career opportunities in your particular field, but it’s worth considering which roles are likeliest to remain stable.

A recession can also make lenders more wary about extending loans or credit since they may worry that borrowers won’t be able to repay their debts. This is tough on families who were hoping that extra wiggle room on their credit limit could help them cover expenses.

Finally, recessions impact people’s standard of living, but an economic downturn doesn’t have an equal effect on everyone. People earning low income tend to be hit hardest; if that’s you, it might be worth looking into what organizations in your community help vulnerable populations. And if you’re feeling secure in your financial situation, you might look up organizations so you can contribute through volunteer work or donations.

Recession benefits

While it’s important not to trivialize the hardship many families experience in a recession, there can be some positive aspects of a recession, too. Right now, high inflation means your dollar doesn’t stretch as far, which can strain family budgets. The Fed’s response to high inflation is typically to increase interest rates, which we’ve already seen in the summer of 2022. This can lead to prices finally cooling off throughout the economy, especially in the housing sector. This is good news for homebuyers hoping to have more negotiation power and lower listing prices in their area.

A “shallow” recession (short, with a modest downturn and minimal layoffs) might actually help rebalance the economy overall and help inflation and prices return to a more manageable state.

Recession-Proof Your Savings

Some economic experts predict there’s more than a 50 percent chance that we are headed toward a recession. In other words, it’s smart to have your finances in order to cover your family’s needs in case a recession does happen.

Ideally, you’ve had an emergency fund saved for ages that can cover six to 12 months of living expenses. Realistically, many of us aren’t feeling as prepared as we’d like to be—and we may not have a ton of extra cash on hand for catch-up saving. 

Here’s what you can do to help bolster your emergency savings.

1. Keep savings in cash

Investing historically tends to yield higher gains than the interest from a savings account. But dependability matters for emergency savings, and it can be risky to have everything in a potentially volatile market investment. Make sure you’ve got some cash in the bank; a high-yield savings account can help you make the most of rising interest rates.

2. Limit credit card debt

When the Fed raises interest rates, many companies follow suit. That means your credit card issuer may be raising variable APR rates on new debt.  

You know which gas station is cheapest and which grocery store has a sale on the yogurt your family likes. Apply that same attention to your credit card balance. Carrying a balance and accruing interest means spending money you didn’t factor into your budget. It could pay off to to pay down as much credit card debt as you can now, so you save on interest and dodge potentially even higher rates in the future. Avoiding new debt may be an even more powerful money-saver than shopping sales. If you do find yourself in a bind, differentiate between the "good" and "bad" places to get emergency cash.

3. Write your budget down

Spending without a budget is like cooking without a recipe. It can turn out OK if you’re deeply familiar with your expenses (or ingredients), but winging a dish that’s new to you can result in a serious mess. 

Even if it worked to guesstimate expenses before, we’re all in less-familiar financial territory thanks to inflation changing everyday costs. Your personal financial situation may also be due for a budget update if you’ve added family members, changed jobs, moved or taken on new expenses recently. Now’s the time to add clear direction to your family spending by writing down your budget, so your spending and saving work out the way you plan.

4. Save what you can

Review your updated budget for clutter—services you don’t use, impulse purchases, overspending or duplicate purchases. You can also help reduce waste and save money by meal planning before you grocery shop, or taking inventory before you shop for back-to-school season.

Considering it’s been a volatile few years and inflation is high, it may be tough to find a lot of wiggle room to save more. Even your kids' college savings might take a hit in a recession.

Of course, every bit adds up, so do what you can. If you’re currently ahead of schedule on retirement or college saving, it might be worth asking a financial professional if it makes sense to redirect a portion of your contributions to emergency savings for a few months. Even if you have a fairly robust emergency fund, it may still be a good idea to throw in a little extra if you can, in case a recession lasts longer or hits your family harder than expected.

5. Keep your investments steady

It’s so natural to see a stock market dip and feel an impulse to get out before it gets worse. Reacting to stock market swings can leave you worse off by locking in losses when the market is down. It’s often best to leave your long-term investments alone and be patient while the market recovers.

A recession may or may not be in the near future, but you can be more prepared either way. Putting extra in your rainy-day savings now can help you feel more secure and in control of your family finances no matter which way the economy goes.

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