By Andrew Shilling
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With markets posting double-digit losses, inflation breaking decades-old records, and the Federal Reserve steadily increasing interest rates, among other factors, the likelihood of a full-blown recession may seem inevitable. Indeed, the latest Bloomberg Economics model projections reveal “the 12-month estimate of a downturn by October 2023 hitting 100%,” which is “up from 65% for the comparable period in the previous update.” And a number of reports, including this one from Vanguard, say it’s more than likely we will soon enter a recession. What’s more, Roger Aliaga-Diaz, the fund manager’s U.S. chief economist and head of portfolio construction, told MarketWatch Picks that he thinks a recession is “most likely” to occur sometime in 2023.
Nevertheless, experts say with the right savings strategy — made easier by the fact that savings accounts like these are now paying far more than in years past — there is plenty that can be done to prepare for even the worst economic turmoil. Here’s how to do it, pros say.
Get yourself an emergency savings buffer — stat.
Regardless of its potential scale, or whether the broader economy actually sinks into a technical recession, investment experts say everyone has at least one tool in their arsenal: saving. More specifically, everyone should have an emergency savings buffer, according to Radix Financial founding principal Amy Hubble, who recommends six months of expenses socked away.
“Mortgage rates have doubled, continued supply shortages are causing upward price pressure on consumer products, gas and food prices have risen sharply, and savings and retirement investment accounts have plummeted with the market,” she says. “Despite all that, the biggest risk to Americans during a recessionary period is that they will lose their jobs.”
See some of the highest-paying savings accounts now here.
Caleb Tucker, chartered financial analyst and director of portfolio strategy at Merit Financial Advisors in Atlanta, Georgia, agrees that building a six-month safety net is critical, especially during uncertain times. “In general, six months of living expenses is probably appropriate for most people,” Tucker says when considering how much cash is really needed in reserves for a recession. “The bottom line is you want to have enough savings to avoid having to tap investments or other assets to pay bills in the event of job loss or large, unexpected expenses,” he says.
Assess your personal financial situation to determine exactly how much to save.
But not everyone needs to save the same amount. Tucker notes that for some people, especially retirees, “it’s possible that more emergency savings should be kept on hand, either in cash or other very short-term cash-like investments.”
How much you need depends on your risk tolerance and your own financial standing, according to Tess Zigo, certified financial planner at LPL Financial in Palm Harbor, Florida. While Zigo agrees “everybody should have in place at least three to six months of reserves,” she says the type of job you have and your own security is also a major factor. ”You should ask yourself how your company is doing in comparison to others in your field.”
Zigo adds that for many of her clients, either in the medical field or for some in the technology sector, they “are not too worried” when compared with the pressure others may be facing. That is why she said self assessment is so critical right now. If people are getting “cut in your department, maybe you should be saving a little bit more.” Also, Zigo explains, “some people have a lower risk tolerance and other clients have 12 months worth of cash on hand. And it helps them sleep at night.”
See some of the highest-paying savings accounts now here.
But there is such a thing as saving too much, even amid a looming recession, Zigo says. “If you’re keeping $200,000 in cash, then we need to talk about it.”
Don’t panic.
It’s easy to hear the world recession and panic. But Aliaga-Diaz suggests that “every indicator is that this is not a 2008 type of recession” on the horizon, and that “those are more of a financial crisis or meltdown” type of event. He believes the next recession will feel more like the “dot-com bubble,” adding that if we do get into one, “we’re going into the recession in a much better condition — the financial sector is much healthier,” and “corporate America is much stronger.”
In other words, don’t panic and don’t change your long-term investment strategy, says Hubble. And if you’re so inclined, look for opportunities in the markets. Although broad equity markets are down, investors should remember that equities “can be purchased at a discount,” Hubble says, adding that “even if you’re not ready to take a lot of risk, yield rates on low risk bonds are being offered at 10 year highs. Hold your nose and buy. Your future self will thank you.”
