Summary.If you want to come out of a recession more financially stable than before, here are some options:
- Reassess your expenses and increase your savings. An emergency fund of six months will help you face potential financial hardships.
- Invest in things that increase in value over time. During recessions, you have access to more assets for less money. It’s common to see the stock market declining, which provides an opportunity to invest or purchase shares of good companies at a discounted price.
- Diversify your investments. When it comes to the stock market, for beginners, an index fund — a mutual or exchange-traded fund that tracks a market index such as the S&P 500 or Total Stock Market Index — is likely the best place to start.
- Leverage tax advantages. Some retirement accounts offer tax benefits, like a 401k, 403B, 457. With these accounts, your contributions are deducted from your income to calculate how much you should pay in taxes. In other accounts, like a Roth IRA and Roth 401k, your investments grow tax-free until retirement.
- There are also tax deductions for owning real estate property, and the possibility to defer tax payments on real estate profits via a 1031 Exchange while continuing to build wealth through real estate.
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You’ve probably heard that a recession is coming more times than you can count over the past year. By now, you may be wondering, is it true?
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The factors the NBER assesses include consumer spending and employment, among others. In the first half of 2022, U.S. Gross Domestic Product(GDP) decreased for two consecutive quarters, although it increased at an annual rate of 2.6% in the third.Inflation is continuing to soar at 8.2%, reaching its highest increase in 40 years. Unfortunately, these signs are causing more and more economists to predict a recession.
This may sound scary, but if you’re reading this, you’ve already lived through at least a few recessions. Probably the first thing that comes to mind is the Great Recession, which occurred from 2007 to 2009, and was one of the worst financial crises since the Great Depression. You also just lived through the shortest recession in U.S. history, which occurred between February and April 2020, when the global economy ground to a halt as the coronavirus spread around the world.
While recessions are challenging times, they’re also part of the normal business cycle. If you know how to prepare yourself, you can (at the least) remain financially stable, and (at the most) use them to gain unique opportunities to build wealth.
So, what can you do to prepare?
To answer this question, I spoke to a series of finance experts with experience in this area, including: Marc Russell, a former financial advisor and founder of the financial literacy platform Better Wallet; Chloe Daniels, founder ofCloBare Money Coach; andAttiyah Blair, a multi-millionaire real estate investor who started her journey during the Great Recession.
If you want to come out of a recession more financially stable than before, here’s what to do.
1) Reassess your expenses and increase your savings.
As a first step, take a close at your spending habits and create a plan to increase how much you save. Building up your emergency fund will prepare you to tackle future expenses that aren’t already a part of your monthly budget, including unplanned costs due to a shortage of cash, a layoff, or other unexpected events like an increase in food or gas prices.
An emergency fund of six months will help you face potential financial hardships.
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.
Pro tip: Finding a second source of income — outside of your day job — will keep you extra prepared. Whether you decide to pick up a part-time job, start a side hustle, or sell used items (books, clothes, jewelry) through second-hand vendors, creating additional revenue will give you something to fall back on in case of a reduction in or loss of your primary income.
2) Invest in things that increase in value over time.
As you increase your cash reserves, investing more in assets (things that increase in value), like stocks or real estate, will pay off in the long term. The key is to invest with a 10-year outlook.
During recessions, you have access to more assets for less money. It’s common to see the stock market declining, which provides an opportunity to invest or purchase shares of good companies at a discounted price. Between January and mid-October 2022, the S&P 500 index,a securities index made up of 500 of the largest publicly traded U.S. companies, had declined by over 20%. While a short-term investor might see the 20% price drop as a loss, it presents an opportunity for the long-term investor to build wealth.
“Historically, since 1957, when the S&P 500 was created, the market has been returning close to 10% yearly on average. The market is going to go up and we will see downturns over time, But, in times like today, the market is on sale. It’s a great opportunity to consider investing more in good companies with a long-term strategy because you’re buying the stocks at a lower cost basis,” Marc Russell told me.
The real estate market has also slowed down since the beginning of the year, though home prices have significantly increased overall in the past two years. If we enter a recession, people will have less access to cash and credit. As a result, we will start seeing more real estate deals; short sales or even foreclosures will happen more. Attiyah Blair began investing in real estate during the 2007 recession and shared that she has since then become a multi-millionaire through long-term real estate investing. She shared the importance of buying real estate properties with a long-term view.
“I was 23 in 2007 when I bought my first rental property. I lived in it and rented it out after moving out. I kept the property throughout the recession because once you sell it, you don’t get the wealth-building part of real estate. So, during a recession, buying rental real estate properties will provide additional cash flow for you and an opportunity to build wealth through property appreciation over the long term,” Blair said.
Pro tip: One of the most important things to remember is that investing is a long-term financial play. So, try not to be deterred by the short-term movements of the market. Dollar-cost averaging, or investing progressively in the stock market instead of all at once, is extremely valuable during challenging economic times.
“When we’re in a recession, it becomes even more important to continue with dollar-cost averaging, which allows you to keep putting money in the market and autopilot things so that you’re not constantly worried about what the market is doing. If you can stick to a plan and automate you investments, you’re less likely to be constantly checking your accounts and seeing the up and down movements of the markets,” Chloe Daniels said.
3) Diversify your investments.
Seeing that the price of one stock is down, and then deciding to put all your money into that stock is too risky. When it comes to the stock market, for beginners, an index fund — a mutual or exchange-traded fund that tracks a market index such as the S&P 500 or Total Stock Market Index — is likely the best place to start.
“Index funds provide what most investors want in their portfolio: diversification and passive management. Because if your portfolio is actively managed, that’s increasing the fees eating at your returns,” Russell said.
Can you diversify your investments by picking individual stocks? Sure, but it’s a more complicated exercise that would require a more significant investment.
The experts I spoke to recommend purchasing an S&P 500 index fund for a few hundred dollars from low-cost brokerage firms like Fidelity, Vanguard, M-1 Finance, and others. “If you’re buying low-cost, well-diversified index funds, you’re betting on the entire market rather than trying to pick an individual winner,” Daniels said.
Pro tip: In the long run, the stock market and real estate assets increase in value over time. The sooner you start investing, the better you will position yourself to build long-term wealth.
4) Leverage tax advantages.
There is a multitude of tax advantages available to you when you invest in assets. For ages, people have been using the stock market and real estate to build wealth for this reason.
For instance, some retirement accounts offer tax benefits, like a 401k, 403B, 457. With these accounts, your contributions are deducted from your income to calculate how much you should pay in taxes. In other accounts, like a Roth IRA and Roth 401k, your investments grow tax-free until retirement. There are also tax deductions for owning real estate property, and the possibility to defer tax payments on real estate profits via a 1031 Exchange while continuing to build wealth through real estate. It’s essential to leverage these benefits on your wealth-building journey.
“Taxes are our biggest expenses. So, if we can legally save money on taxes, why wouldn’t we? Many people don’t want to invest in retirement accounts because they think it locks their money up until retirement. But there are so many ways of getting around that legally that you do not need to worry about that right now,” Daniels said. “Instead, worry about getting as much money as invested as you can. You’re in your younger years of earning, probably making the least amount of money you will ever make. If you can, front the tax bill now by investing in Roth accounts and get tax-free growth for the rest of your life.”
Pro tip: Using tax-advantaged accounts and tax deductions will help you reduce your overall tax liability and accumulate more wealth.
You can prepare for the next recession by looking closely at your money, increasing your income and cash reserves, and investing progressively and consistently. Do this, and you may come out the other side in a much better financial position.
Editor’s note: This material has been prepared for informational purposes. If you are seeking more specific financial advice, it is best to consult tax, legal, and accounting advisors who can provide guidance on your unique situation.
FAQs
A certificate of deposit (CD) is another good place to keep your money in a recession. CD rates are comparable to high-yield savings account rates — currently, they stand at about 5%. CDs share some similarities with high-yield accounts, including FDIC or NCUA protection, but they have some key differences.
How can I protect my money in a recession? ›
A certificate of deposit (CD) is another good place to keep your money in a recession. CD rates are comparable to high-yield savings account rates — currently, they stand at about 5%. CDs share some similarities with high-yield accounts, including FDIC or NCUA protection, but they have some key differences.
Should you have money in the bank during a recession? ›
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
What should you do with your money to prepare for a recession? ›
Preparing for a recession comes down to using strong economic times to your benefit. Focus on limiting your spending, forming a budget, building an emergency fund and eliminating high-interest debts.
How much cash do I need during a recession? ›
Finance Experts All Say the Same Thing
GOBankingRates consulted quite a few finance experts and asked them this question and they all said basically the same thing: You need three to six months' worth of living expenses in an easily accessible savings account.
Should I take my money out of the bank 2023? ›
Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.
What not to do during a recession? ›
For example, you'll want to avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Workers considering quitting their jobs should prepare for a longer search if they decide to find a new one later.
Is it better to have cash or property in a recession? ›
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.
Where is your money safest during a recession? ›
Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.
Should you hold cash before a recession? ›
Liquidity. Your biggest risk in a recession is the loss of your job, if you're still employed or semi-employed. If you need to tap your savings for living expenses, a cash account is your best bet. Stocks tend to suffer in a recession, and you don't want to have to sell stocks in a falling market.
In a deflationary recession, prices fall while the economy contracts. Various factors, such as a decrease in the money supply or an increase in production, can cause this. A deflationary recession can be challenging to manage because it can lead to lower interest rates and higher unemployment.
Is cash King during a recession? ›
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
Who benefits in a recession? ›
In a recession, the rate of inflation tends to fall. This is because unemployment rises moderating wage inflation. Also with falling demand, firms respond by cutting prices. This fall in inflation can benefit those on fixed incomes or cash savings.
Is holding cash bad during recession? ›
Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.
What do people spend money on during recessions? ›
Overall during economic recessions consumers tend to dine out at cheaper places, purchase less durable goods and go on less vacations.
Is $20000 in the bank good? ›
$20,000 can be a healthy amount of savings but this largely depends on several factors, including your age, income, lifestyle or choice of retirement account. If you are under 45, $20,000 in savings would be considered above average.
Which banks are in trouble in 2023? ›
List of Recent Failed Banks
| Bank Name | City | State |
|---|
| First Republic Bank | San Francisco | CA |
| Signature Bank | New York | NY |
| Silicon Valley Bank | Santa Clara | CA |
May 30, 2023
Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.
Is my 401k safe during a recession? ›
What can happen to your 401(k) in a recession? Unfortunately, a recession can hurt asset prices, and therefore your 401(k) balance. According to CFRA Research, an investment research firm, the S&P 500 has lost an average of 8.8% of its value during the four recessions since 1990.
Is it good to buy a house during a recession? ›
During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.
Since the beginning of 2022, cash equivalents have materially outperformed stocks and bonds and - with short-term interest rates all but certainly headed higher before they head lower and a recession increasingly likely to hit soon - cash continues to look like it is king in 2023 and potentially beyond.
Where do you put your money during a banking crisis? ›
The FDIC protection for deposits makes banks look appealing in difficult times, but there are alternative places to put money. Federal bonds are considered very safe but have very low returns. Real estate can produce income but can be risky. Precious metals, especially gold, offer an alternative to stocks and bonds.
Who will a recession hurt the most? ›
The riskiest industries to work in include:
- Real estate.
- Construction.
- Manufacturing.
- Retail.
- Leisure and hospitality.
Recessions can impact your savings in many different ways. Lower interest rates, stock market volatility, and potential job loss can drain your savings. Diversifying your investments, building an emergency fund, and opening a high-yield savings account can help protect your savings.
What is the best asset in a recession? ›
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
How long do recessions last? ›
Recessions over the last half a century have ranged from 18 months to just two months. Federal Reserve economists believe the next downturn may stick around for longer than usual.
What goes up in price during recession? ›
Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too. You can invest in precious metals in a few different ways.
What rises during a recession? ›
Rising unemployment is one of a number of indicators that define a recession. It also makes the downturn worse.
Which is worse inflation or recession? ›
Yes, inflation punishes the poor, but recession punishes them more and makes them even poorer. When inflation gets worse, it is known as hyperinflation, and when a recession worsens, then you have a depression.
Who profits most in a recession? ›
5 Companies That Always Profit During A Recession
- The Walt Disney Company. Media and family entertainment company Walt Disney Co. stock outperformed the S&P 500 by 8.8% in 2008. ...
- Netflix, Inc. Like Disney, Netflix thrived during the 2008 and 2020 recessions. ...
- Home Depot. ...
- T-Mobile. ...
- Synopsys, Inc.
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments. Millionaires also bank differently than the rest of us.
Who wins when there is a recession? ›
The wealthy are always more likely to win in recessions, as NYU economist Edward Wolff has found. During recessions, wealth and income inequality grows. And as economist Hilary Hoynes and others have discovered, poor and indebted households are affected much more by business cycles.
What does a recession do for the average person? ›
Increased stress all around. One of the most prevalent ways that recessions affect the average person is simply that stress goes up. It doesn't matter if you're comfortable in your job security and have a hefty financial cushion, or if you're struggling to make ends meet and have $100 in your savings account.
What kind of job is recession proof? ›
Law enforcement is among the most secure professions and gets even more critical during harsh times like economic recession due to high crime rates. Some stable jobs in the field of law enforcement include police officers, detectives, paralegals, criminal defense, healthcare law, legal assistants, and bankruptcy.
How to become a millionaire during a recession? ›
How to make money in a recession
- Invest in stocks. Every investor wants to buy low and sell high. A stock market downturn during a recession might be an opportune time for bargain hunters. ...
- Invest in real estate. Real estate offers another potentially lucrative opportunity during a recession.
Consumer staples, including toothpaste, soap, and shampoo, enjoy a steady demand for their products during recessions and other emergencies, such as pandemics. Discount stores often do incredibly well during recessions because their staple products are cheaper.
What happens to Social Security during a recession? ›
Social Security's interest-earning potential can decline
During most recessions, the nation's central bank lowers interest rates to spur economic activity and lending, which can reduce the net interest income generated by Social Security.
Where do you put cash during inflation? ›
What are the best investments to make during inflation?
- Real estate. Real estate is almost always an excellent investment and should be at the top of your list. ...
- Savings bonds. ...
- Stocks. ...
- Silver and gold. ...
- Commodities. ...
- Cryptocurrency.
Pre-packaged food items, like chips and cookies, offer shelf-stable options to help ensure your stock doesn't go bad as you're building consumer awareness of your expanded offerings. Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand.
Should I stop contributing to retirement during recession? ›
Even during tough times, there are reasons to keep up your retirement contributions, if you can. While you may be looking for ways to have more money in your budget, it might be tempting to stop contributing to your retirement account.
Furthermore, during a recession, investments may lose value, and retirement savings may be impacted. This can have long-term implications for individuals' financial security, especially those nearing retirement age.
Can I live off interest on a million dollars? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Is it bad to hold cash during inflation? ›
Because there is no chance of a decline in value, “cash is the best option, even if inflation is a risk factor,” she says.
