As more companies in the U.S. lay off workers and the economy continues to experience high inflation despite higher interest rates, many people are wondering if the U.S. economy will head into a recession. Let's take a look at what happens to your savings in a recession and how to safeguard your finances.
What is a recession?
A recession is a term used to describe a significant decline in economic activity. A common rule of thumb to define a recession is when we see two consecutive quarters of negative economic growth. However, it is much more complex than that. Recessions are officially declared by eight economists from the National Bureau of Economic Research (NBER). According to the NBER, a recession is "a significant decline in economic activity that is spread across the economy and lasts more than a few months." The last time we were in a recession was during the start of the COVID-19 pandemic, from February to April 2020.
When a recession occurs, there is a drop in the production of goods and services, unemployment rates rise, and the stock market declines. This can result in a decrease in consumer spending, which can worsen the situation. Recessions can last for a few months to several years and they can affect different countries and industries in different ways.
How does a recession affect your savings?
If you're someone who has saved diligently over the years, a recession can be a real punch in the gut. Here's what you should watch out for.
Savings interest rates decrease
When the economy is in a recession, interest rates tend to go down to promote borrowing, which can stimulate economic activity. Unfortunately, this means that the interest rates offered by banks, particularly on savings accounts, will drop too. In turn, it affects the amount of interest you earn on your savings. However, inflation also tends to be lower during a recession, so the value of your money is higher than when there is high inflation.
Stock market volatility
Investors who have put their money in the stock market are usually hit hard during a recession. During this period, the stock market usually experiences a lot of volatility as investors panic and offload their stocks, leading to a decline in the markets. Unfortunately, when the stock market is performing poorly, your investments may also be significantly affected, particularly if you have money in stocks or mutual funds.
Job security
Another risk associated with a recession is the potential loss of a job. When businesses are struggling financially, they may need to downsize their workforce or shut down altogether, which could leave you without a reliable income stream. Without income, you may need to dip into your savings to cover your expenses, which could deplete your savings much faster than you expect.
How to protect yourself in a recession
There are ways to protect your savings during a recession. Keep your savings in a high-yield savings account or certificate of deposit (CD). While the interest rates on CDs and savings accounts may not be high, they are generally safe and can provide some protection against inflation. However, it is important to remember that the FDIC only insures deposits up to $250,000 per depositor per insured bank. So, if you have more than $250,000 in savings, you may need to spread your deposits across multiple banks to ensure that they are all fully insured.
It is also important to have an emergency fund in place. During a recession, it is much more likely that you may lose your job or experience a decrease in income. Having an emergency fund with at least three to six months' worth of expenses can help you weather the storm without having to dip into your long-term savings.
To protect your savings from a market crash, focus on diversifying your investments across multiple asset classes. Consider investing in bonds, commodities, and other alternative investments that tend to perform well when the stock market is struggling. Additionally, don't trade frequently or try to time the market; take a long-term investment approach and focus on your goals.
Focus on paying off any existing debts you have as quickly as possible. If you do need to borrow to cover expenses, make sure to do so in a responsible manner, only taking on what you can afford to pay back in a reasonable time frame.
While recessions can be scary, there are steps you can take to protect your savings from their potentially negative effects. Remember to stay focused on your long-term goals and don't make emotion-based decisions in response to short-term market changes. By taking a proactive approach, you can safeguard your savings and come out on top.
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FAQs
Savings interest rates decrease
What happens to your savings account during a recession? ›
Banks during recessions FAQs
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Should you save cash during a recession? ›
Finance Experts All Say the Same Thing
They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
Where is your money safest during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Can you lose your money in the bank during a recession? ›
About Recessions and Ensuring Deposit Insurance
If the United States were to enter a recession, the funds you have saved at a bank aren't at risk of becoming lost or inaccessible the same way they were during the Great Depression.
Should I take my cash out of the bank? ›
You should only take your money out of the bank if you need the cash. In the bank, cash is less vulnerable to theft, loss and disaster. And depending on the bank account, you could be earning interest on your cash that you won't be earning if it stays under your mattress.
Should I take my money out of the bank in 2024? ›
First and foremost, it is essential to choose a bank that is insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits up to $250,000 per depositor, per insured bank. This means that if your bank fails, you can still get your money back up to the insured amount.
What is the best savings account during a recession? ›
A high-yield savings account will help you earn much more than the average rate of return, which means your money will work harder for you. Even if interest rates dip during a recession, a high-yield savings account will typically earn several times the national average for savings accounts.
What is the best asset to hold during a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Are people pulling money out of banks? ›
Americans are moving hundreds of billions of dollars out of banks — especially smaller regional banks — into larger institutions, as well as money market funds, government bonds, high-yield online savings accounts, even cryptocurrencies and gold.
What happens to cash savings in a recession? ›
Savings interest rates decrease
In turn, it affects the amount of interest you earn on your savings. However, inflation also tends to be lower during a recession, so the value of your money is higher than when there is high inflation.
Can banks seize your money if the economy fails? ›
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
Are CDs safe in a recession? ›
CDs are primarily a safe investment. They are guaranteed by the bank to return the principal and interest earned at maturity. CDs can provide modest income during turbulent economic times like recessions when other types of investments often lose value.
Do savings rates go up in a recession? ›
Do Interest Rates Rise or Fall in a Recession? Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.
Where is the safest place to put money if banks collapse? ›
1. Federal Bonds. The U.S. Treasury and Federal Reserve (Fed) would be more than happy to take your funds and issue you securities in return. A U.S. government bond still qualifies in most textbooks as a risk-free security.
Where does the money go during a recession? ›
During recessions, one of the primary culprits responsible for money vanishing into thin air is the collapse of banks. As financial institutions crumble under the weight of bad loans and dwindling assets, they often go belly up, taking the money entrusted to them along for the ride.
Can the government take money from your bank account in a crisis? ›
The government can seize money from your checking account only in specific circ*mstances and with due process. The most common reason for the government to seize funds from your account is to collect unpaid taxes, such as federal taxes, state taxes, or child support payments.
