Why and how to save during a recession
Prepare for a potential recession by learning about recession saving strategies that can help you keep building your financial future, even through tough times.
A note: Please kindly note that we do not provide investment, tax, legal or accounting advice; and this material has been prepared for informational purposes only. You should consult your own advisors before engaging in any transaction. You can find detailed disclaimers on Cenoa’s website.
We’re currently in a challenging economic environment. Inflation is projected to reach a global average of 6.7%, thanks to the continued impact of COVID, conflict between Russia and Ukraine, China’s zero-COVID policy, climate change, and ongoing corporate greed. Crucial expenditures like food and energy have gotten much more expensive.
This has led the cost of living to skyrocket all over the world, and unfortunately, salaries have not even come close to matching these increases. Everywhere, people are facing significant challenges to their financial security.
There also are fears of a recession — in fact, there’s debate about whether or not we’re already in one, as some key economic indicators are down, while others remain stable or up. Whether or not we enter a recession in 2023, it can be helpful to learn about saving during an economic downturn.
We have gathered information on why and how you can save during a recession. But first:
What is a recession?
A recession is a widespread, prolonged, significant downturn in economic activity. The most straightforward indicator of a recession is two consecutive quarters of negative GDP (gross domestic product).
Recessions bring layoffs and high unemployment, as companies tighten their purse strings. Then, consumers curtail their spending in fear that they’ll be let go, or as a result of being let go. And since consumers spend less, companies have less income, and have to lay off more workers.
It’s also helpful to know about bear markets, which can often accompany recessions. A bear market is when the price of securities falls more than 20%, due to investors pulling back. For people with significant money held in stocks, a bear market means they lose a lot of money — at least temporarily, until the value of stocks rebound.
Why save during a recession?
If a person has lost their job and is struggling to keep food on the table and keep the lights on, saving is reasonably the last thing on their mind.
But in less extreme circumstances, like if you’re feeling the pinch of increased cost of living and you’re having a bit more trouble saving money than usual, it can still be helpful to keep saving — even if you’re just keeping a few leftover dollars at the end of each month.
Try to keep your long-term financial goals on track
The short-term reality of living in a recession, or even just in a time of historic inflation, is overwhelming. Most people readjust their budgets and identify excess expenditures to cut back on, from big things like trips or a new car to small things that add up, like eating out. However, it’s important to continue to keep an eye on your long-term financial goals. If you can stick to your readjusted budget, plan some room in there for building your future.
3 recession-helping saving strategies
Keep your future safe by diversifying your investments and having patience. It is generally advised not to panic if you see things fluctuate short-term.
Note that no saving strategy is truly recession-proof — all strategies are likely to be impacted by a recession to some degree. But it is generally believed that there are some strategies that are better at withstanding the stress of a recession or recovering long-term. Here’s three of them. Please note that these are not investment or saving advice, but only provided as general information for your review; and please consult your own advisors prior to engaging in any transactions. You can find detailed disclaimers through Cenoa’s site.
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Index funds like the S&P 500
The S&P 500, and other major index funds like it, have an advantage over single stocks, because it’s a collection of 500 of the top stocks available, across many industries. It does show the impact of recessions, but it’s more likely to recover long-term.
However, there are also alternatives: check out this list of 15 individual recession-proof stocks. Know that individual stocks are riskier than index funds.
Buying physical gold, or investing in gold-related mutual funds, is known to be a relatively safe investment. Its value does fluctuate significantly but generally trends upwards. It is generally suggested not to put all your life savings into one asset, diversifying your investment strategies might help you out beyond the short-term impacts of a recession.