Is My Money Safe During a Recession?

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An economic downturn can produce a lot of anxiety about your finances, your career and your future. Not all of these factors are out of your control, however. Taking measures to help safeguard your money during a recession can give you some comfort and help ward off fear of what lies ahead. So, what are the safest places for your money during a recession? That will depend on factors such as your employment situation, your financial circumstances and your comfort with financial risk.

A recession, according to the National Bureau of Economic Research, is "a significant decline in economic activity" that stretches across the economy and lasts more than a few months. Not knowing the end date of a recession can leave you wondering whether you should leave your money where it is or move it to someplace safer to wait out the storm. You may also be unsure of whether a recession is a good time to pay down debt.

You have several options for where to put your money during a recession. These include:

  • Keeping it in a federally insured account at a bank or credit union.
  • Paying off debt.
  • Allocating money toward stocks and other investments.

Read on as we explain the factors to weigh as you try to shelter yourself during uncertain times.

Keep Your Money Safe in an FDIC-Insured Bank Account

One place to safely keep your money is an FDIC-insured bank account. If you have checking and savings accounts with a traditional or online bank, you likely are already protected.

The Federal Deposit Insurance Corp. (FDIC), an independent federal agency, protects you against financial loss if an FDIC-insured bank or savings association fails. Coverage is $250,000 per depositor, per ownership category (such as single or jointly owned). This includes checking accounts, savings accounts, money market accounts and certificates of deposit (CDs) at traditional banks as well online-only banks. The same $250,000 per-depositor coverage limit applies to accounts at credit unions insured by the National Credit Union Administration, a federal agency. So, for example, if you held a joint checking and savings account with your spouse, you each would have $250,000 in FDIC coverage, so $500,000 total on the combined accounts.

If you're unsure whether your accounts are FDIC-insured, you can check with your institution or look it up on the FDIC's BankFind database.

An FDIC-insured account is also a great option for your emergency fund. If you don't already have one, starting an emergency fund can provide a cash cushion in case you lose your job or your work hours are cut during a recession.

Generally, your emergency fund should contain enough money to cover at least three to six months' worth of living expenses. But if you're just starting out, set aside as much as you can on a weekly or per-paycheck basis until you feel more comfortable fully funding your emergency account. Anything you can save now could help if your financial situation worsens.

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Should You Pay Off Debt in a Recession?

Paying down debt during an economic downturn can put you in a good position to weather financial turbulence. That's particularly true if you're carrying expensive high-interest debt on credit cards and the like.

But even if you can only afford to pay the minimums, it's important to make all your debt payments on time. If you begin missing payments, your credit scores will suffer, putting you in a difficult position if you need credit down the road. Credit scores can also affect your insurance rates and ability to rent an apartment, so do whatever possible to continue making these payments. If you have enough cash on hand to build up your emergency savings and pay off high-interest debt, you'll be in an even better position.

However, you might run into trouble making debt payments during a recession. If that's the case, ask your lender about payment relief or look into a debt consolidation loan or 0% intro APR balance transfer offer on a credit card. You can also explore credit counseling to help get a handle on your debt.

Should You Invest During a Recession?

While it comes with risks, investing during a recession might be a viable option if you have a healthy emergency fund, aren't carrying big balances on high-interest credit cards, and are comfortable with the possibility of losing money. If you are looking for the safest place for your money during a recession, this isn't it. But if you have extra money and are looking at getting into an investment when it's less expensive, you could reap benefits.

Every investor should keep in mind that stocks and other investments could experience extreme ups and downs during a recession. But at the same time, a recession could push down prices for stocks and other investments, providing an opportunity to buy at a low cost and then see your investments gain value when the economy rebounds. Just know that there are no guarantees that this strategy will pay off in the short term or long term.

If you decide to take the investment plunge, there are a number of ways to do it. You could buy stocks and other investments through a traditional brokerage firm or online brokerage firm, for instance. Aside from individual stocks, which give you a direct ownership stake in a company, other investments include:

  • Mutual funds and exchange traded funds (ETFs): These funds buy an array of stocks, bonds and other securities.
  • Bonds: With a bond, you're essentially lending money to a corporation or government in exchange for the promise of being paid back with interest.

Rather than buying stocks and other investments on your own, you might want to invest through a 401(k) or IRA (individual retirement account). Both of these accounts are geared toward saving for retirement.

If you're nervous about doing DIY investing, you also might want to enlist help from a traditional financial advisor or a (non-human) robo-advisor, which makes automatic investment decisions based on your preferences.

How to Protect Your Credit During a Recession

Protecting your money during a recession also involves protecting your credit.

Amid an economic downturn, your financial situation could take a turn for the worse, resulting in your credit scores going down. Keep in mind, though, that a recession itself doesn't directly affect your credit scores.

So, how can you maintain your credit during a recession? Credit scores are computed based on how you manage your debt. If you lose your job and aren't able to keep up with your bills, your credit scores could suffer. Therefore, it's important to take steps to safeguard your credit if you're experiencing financial difficulties or in case you might encounter financial problems:

  • Keep an eye on credit reports and credit scores. This can help you track how changes in your finances might be affecting your credit. With this information in hand, you can take action to shore up your credit, such as disputing an inaccuracy on your credit reports or tweaking your finances to improve your credit. Experian's free credit monitoring tool can help with this effort.
  • Pay off debt. To the extent possible, reduce your debt so you can put yourself in a better financial position. To come up with more money to pay off debt, look at ways to trim spending.
  • Communicate with lenders. Payment history represents the biggest factor in calculating your credit scores, so it's vital to keep up with your debt payments. But if you've fallen on hard times, reach out to your lenders to ask about ways they can ease your debt load, such as deferring payments or lowering your interest rate.
  • Stay within your budget. A budget can be a crucial tool to help navigate a recession by helping you closely track your expenses and earmark portions of your income for various needs. This can help keep your finances in shape and can show how you may need to adjust your budget if you're already feeling financial strain. If you haven't created a budget, it's never too late to set up one.

Tips for Recession-Proofing Your Finances

Let's say you've smoothly sailed through an economic downturn. That certainly can feel reassuring. However, what if the economic waters became choppy for you in a few months? Would you be prepared? Here are three tips for recession-proofing your finances:

  1. Watch your debt. Reduce your existing debt as much as possible and resist taking on more debt.
  2. Establish an emergency fund. You never know when a recession might hit your finances. Therefore, you should create an emergency fund if you don't already have one. This pool of money can help you cover everyday expenses during a tough time.
  3. Don't overextend yourself. To ease potential financial harm during a recession, be sure to live within your means by sticking to a budget. In other words, focus on paying for the basics and avoid splurging on extras like a new TV or a ski trip.

The Bottom Line

Keeping your money as safe as possible during a recession involves a number of moves, such as stashing money in a federally insured account, starting (or adding to) an emergency fund and slashing debt. Beyond that, you can also protect your finances by regularly monitoring your credit reports and credit scores to help you strengthen your credit and ride out a difficult financial time.