What should I do with my savings if there’s a recession?

You might be wondering if you will feel the effects of a U.S. recession in 2023, given the high number of company layoffs and the lower inflation rate. Also, what you can do to protect yourself if one does occur.

A prolonged economic downturn is characterized by an extended period of negative economic growth. Although this happened in 2022 experts disagree about whether the U.S. is currently experiencing the full effect of a recession. Inflation decreases, consumers spend less, and businesses lay off workers to keep them afloat.

Here are some tips to help you avoid worrying about the possible impact of a recession on your savings.

Good news is that inflation rates slow during recessions. This means that your purchasing power increases and your money value stays the same or slightly increases. This means that your savings are worth more than when there is high inflation.

The Federal Reserve usually responds to inflation by decreasing interest rates. This typically leads to increased consumer spending because it is cheaper for them to finance purchases. However, this can also lead to a decrease in interest rates on bank accounts, which means that you will earn less interest.

It is important to have emergency savings, no matter how the economy is doing. Unexpected expenses such as car repairs or medical issues can happen at any moment. However, it’s important to save money during recessions as economic uncertainty can cause other financial problems such as layoffs. It can be stressful to lose your job unexpectedly, but having an emergency fund can make it easier to cover expenses until you find a new job.

Katherine Heeren, blogger and creator of The Nimble Budget Planner, said that her husband was fired from his job in the aviation industry in 2020. They were thankful that they had been planning for possible job losses based on economic conditions and that they had been trying out their lean budget.

Heeren states that “we did the math to figure out how many months it would take us to live comfortably.” We didn’t wait for the inevitable to happen. We reduced discretionary spending and were able save more for our emergency fund .”

Heeren and her family had been living comfortably below their means when her husband was laid off. They were able to afford new clothes and salon visits and they had months of savings.

It is a good idea to have at least three to six months worth of expenses in case of an unplanned job loss. Calculating your emergency fund involves taking a look at your monthly expenses and subtracting any non-essential purchases. Then multiply that number by however many months you wish to save. Start with $500 if that amount seems too high. This should be enough to cover minor emergencies like a repair to your home or a trip the veterinarian.

Howard Dvorkin is a certified public accountant, chairman of Debt.com and says that the best way to save money is to find out what you are currently spending. People will see that 15-20% of their spending is unnecessary, such as subscriptions they don’t use.

Dvorkin suggests that people cut back on unnecessary spending to save money and prepare for economic uncertainty.

Dvorkin says that debt can become a significant block to financial health in times of recession.

Dvorkin states that if you have credit card debt it can be difficult to save for an emergency.

He also said that you shouldn’t rely on your retirement savings or credit cards if your job is lost.

High-yield savings accounts will allow you to earn more than the average return rate, so your money will work harder. A high-yield savings plan will usually earn more than the national average in savings accounts, even if interest rates drop during recessions. While the national average yield is 0.3%, some high-yield savings accounts offer a 4% annual percentage yield or higher. A high-yield account with $10,000 could yield $400 in interest, compared to $35 for an account paying the average rate.

Ask your employer to split your pay into savings and checking when you get paid. This will make saving more manageable. This will make it less tempting to spend money you don’t want or set aside for an emergency fund.