Despite a year of gloomy predictions, Americans are still spending, and this has contributed to the growth of the economy. “If you’re confident about the future you don’t need to save so much,” said Diana Furchtgott Roth, an economist and former chief economic advisor at the U.S. Department of Labor. It doesn’t mean that consumers are safe. In fact, many are struggling as much or more than before.
When the Covid pandemic brought the economy to a standstill and the U.S. government unleashed trillions in stimulus money, American households were suddenly sitting on a stockpile of cash.
“It was the first recession is U.S. history where disposable income went up,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers.
But that cash reserve is now largely gone after consumers gradually spent down their excess savings from the Covid years.
Soaring inflation in the wake of the pandemic made it harder to make ends meet. The Federal Reserve’s aggressive rate hike cycle, which was the most aggressive in 40 years, made borrowing more expensive. People are affected by both factors – lower real wages as well as higher interest rates. “
Whether or not there is a recession, experts say having a cash reserve is important.
You’ll likely need more cash than you think
Recession or not, experts say having a cash reserve is key.
While most suggest keeping three to six months’ worth of cash on hand to weather a job loss or other economic disruption, that’s likely not enough, according to Preston Cherry, a certified financial planner and founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.
These days, households should strive to fund twice the usual recommendation, he advised.
If there is an economic contraction, chances are it could go on for a while. In the past half century, recessions lasted anywhere from two to 18 months. The good news is recessions will end, and there’s hope, recovery and upside. “
Pay down debt as your first safeguard
Before you can build up a proper savings cushion, prioritizing debt repayment is crucial, Sun said.
“Saving while you have debt is like swimming in a pool with a broken arm — you can’t get very far effectively. “
Start by paying off any high interest rate debt, such as credit cards, as quickly as possible, even if that means picking up a temporary job or side gig, Sun advised.
“Once your debt is under control, focus on building your emergency fund, either concurrently or immediately afterward. “
Where to save cash effectively
Even when Americans have an emergency fund, most said they don’t know the best ways to save to reach their short- or long-term savings goals, studies show.
These days, savers could get better returns on their cash than they have in years.
After the series of rate hikes from the Federal Reserve, top-yielding online savings account rates are now as high as 5%, the highest since 2008, according to Bankrate.com.
“The easiest thing to do,” said CFP Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta and a member of CNBC’s FA Council, is “look at moving money out of your checking account into a savings account. “
Alternatives like Treasury bills, certificates of deposit or money market accounts have also emerged as competitive options for cash, although this may mean tying up your savings for a few months or more.
Jenkin recommends buying short-term, relatively risk-free Treasury bonds and laddering them to ensure you earn the best rates, a strategy that entails holding bonds to the end of their term.