Are We in a Recession? If So, Having Cash Helps
Ongoing stock market volatility and record inflation are fueling predictions of a recession. If the predictions are correct, both businesses and individuals will be looking to protect their liquidity and financial security. And one way to accomplish that is by having cash on hand.
In the context of a recession, “cash” typically refers to physical currency as well as liquidity in the form of savings and money-market accounts at your bank. These types of accounts help you avoid the stock market’s inevitable ebb and flow, and ride out an economic downturn.
So, are we in a recession? As of this writing, it is unclear if a recession is under way. An official recession requires two consecutive quarters of declining gross domestic product (GDP). In the first quarter of 2022, the economy shrank 1.6%. Other recession indicators typically include a bear market on Wall Street and rising unemployment.
But while the stock market has been shaky in recent months, unemployment has remained low. In fact, the U.S. economy had been enjoying a period of fast growth that included a 7% boost in the fourth quarter of 2021.
Even though economic experts have differed on whether a recession is coming, and whether it will be a global contraction, the public seems to believe one is on the way. A recent CNBC poll found that 83% of employed adults are worried about a recession. If you’re among them, now is a good time to review your cash position, investments and spending habits to determine how prepared you are to weather an economic storm.
Cash Purchases
It isn’t always possible to make purchases with cash, especially if they involve big-ticket items. Still, whenever possible, paying for purchases with physical currency helps avoid debt and protect liquidity.
Having cash on hand is always a good idea. Cash delivers safety in troubled times. Experts recommend keeping three to six months’ worth of cash to cover living expenses when people lose their jobs. For businesses, maintaining liquidity through a recession can making the difference between shutting the doors or surviving the downturn.
A recent CNBC article offered this advice: “While it’s advised to have a cash cushion no matter the circ*mstance, if we do enter a downturn, backup savings can come in handy to help handle any unexpected and sudden events such as job layoffs.”
In addition to maintaining a cash cushion, the article recommended taking a look at spending. Whether you’re a consumer or a business, it`s quite possible you will identify areas in which you can curb your spending. This can help you add to the cash cushion and avoid new debt.
While taking steps to avoid new debt, it also helps to pay the monthly balance on credit cards to improve cash flow. If paying the full balance isn`t possible, review interest rates and transfer unpaid balances to cards with lower rates whenever possible.
Safety in Cash
It’s possible that a recession will not occur and, if it does, it could be short-lived. In any scenario, it is wise to always keep cash reserves. The more liquidity you have, the better prepared you are to weather any situation
FAQs
Cash gives you a lot of options. You can spend it if you need to, for example, if you lose your job during a recession, and it allows you to make an opportunistic investment if the stock market suddenly sells off or you find the perfect house later on. But there is a downside to holding too much cash.
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.
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.
What happens to cash value in a recession? ›
Savings interest rates decrease
However, inflation also tends to be lower during a recession, so the value of your money is higher than when there is high inflation.
Should I be hoarding cash right now? ›
In times of economic uncertainty, some people may feel as though they should keep a lot of physical cash handy. However, this well-meaning attempt to protect money can backfire if you make it a habit to keep hoarding cash over a long period.
Where should I put my cash during a recession? ›
During a recession, many investors put money in savings accounts to keep money handy and earn interest on savings. Consider investing in a savings account if you're building an emergency fund or prefer stable returns (right now, the top accounts offer rates around 4%-5%).
Where is money safest during a recession? ›
Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.
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.
How do I protect my money in a recession? ›
The Bottom Line
Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
What not to do during a recession? ›
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.
Keep earning money
This may seem obvious, but it's best to avoid withdrawing large amounts from your portfolio during a recession. When stock values have declined, selling shares to cover everyday living expenses can meaningfully eat into your portfolio's long-term growth potential.
What happens to my money in the bank if the economy collapses? ›
Your money will be secured in a bank account during a recession, but only if the bank is FDIC-insured. And if you bank with a credit union, your money is secured if the credit union is insured by the National Credit Union Administration (NCUA).
How much cash should you hold in 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.
Why is cash king during a recession? ›
The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield much, having cash on hand can be invaluable in times of financial uncertainty.
Should I keep cash before recession? ›
The job market uncertainty highlights one of the key pillars of any financial plan: having an emergency fund. Experts typically recommend establishing a fund worth at least six to nine months of your expenses, a cushion of cash that you typically can only build while employed.
Should you stockpile cash? ›
It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend. A locked, waterproof and fireproof safe can help protect your cash and other valuables from fire, flood or theft.
Is cash worth anything in a depression? ›
Gold and cash are two of the most important assets to have on hand during a market crash or depression. Gold historically remains constant or only goes up in value during a depression.
Is money worth more during a recession? ›
Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate. Within the stock market, shares of large companies with solid cash flows and dividends tend to outperform in downturns.
Is it good to save money during recession? ›
Build up an emergency fund
Financial experts recommend setting aside at least six months' worth of living expenses. This means enough money to cover housing and utilities, necessities like food and personal care items, and other financial obligations like loans and insurance payments.
