Council Post: Recession-Proof Your Finances By Evaluating Savings And Debt Today

David Herpers is the SVP of Digital Bank at Credit One Bank. His expertise includes wealth management, banking and product management.

Interest rates are up, inflation has yet to cool off, and recessionary fears are on the rise. As the Federal Reserve continues on the path of what is already the greatest period of interest rate hikes observed since the early 1980s, most consumers need to be evaluating two aspects of their financial future: savings and debt.

The greatest impact of a recession on most consumers is reduced income. Bonuses, commissions, small-business owner earnings and investment income for retirees living on fixed incomes are all income sources that can be negatively impacted. A financial advisor can evaluate your full financial future but some general best practices to recession-proof your finances—especially when interest rates set by the Fed are expected to continue climbing—include a combination of reducing fixed expenses, increasing savings and improving access to credit. Let’s unpack a few near-term and long-term tips to consider.

Making Your Savings Work Harder

A general rule of thumb in economic downturn scenarios is to have six months of expenses tucked away in liquid savings. If you’ve built a comfortable cash cushion, the Fed’s expected interest rate hikes can be a boon—but you must shore up where and how you are saving.

Consider smart investments where interest earning potential rises in correlation to rising federal rates.

Series I bonds (formally named U.S. Treasury Series I bonds) earn interest at both a fixed rate and a variable rate, with the variable rate adjusted on a regular basis due to inflation. For years, the fixed rate has sat at 0% but that recently changed. Individual investors can purchase up to $10,000 in I bonds each year (households filing as married jointly may purchase $10,000 each, up to a maximum of $20,000 between the two). This is an investment vehicle that shows stable interest returns of more than 9% at the time of writing this article. You could even consider setting aside some of a year-end bonus to purchase Series I bonds today or get a jump-start on earning in 2023 by purchasing just after the new year.

CDs can offer higher interest rates on savings you’re willing to set and forget in an account for a certain duration. Not all banks have raised their rates on par with the Fed, so now could be the time to shop around and ensure your savings account interest rate is helping your money grow. Jumbo CDs, which can require initial deposits of $100,000 or more, and high-interest savings accounts offered by digital banks are often advantageous to the savvy saver in times of economic unrest.

Evaluating Your Debt

As interest rates rise, the cost of borrowing goes up. This can have a major macro impact, slowing things like the housing market as individuals and families put off new mortgages and dampening M&A activity as companies avoid taking on new debt at interest costs significantly greater than rates available just six or 12 months ago.

You can look at the interest rate you’re paying on any current loans and consider prioritizing which debt you should focus on more. If you carry any debt with variable interest rates, consider refinancing or consolidating into fixed-rate options.

Knowing the interest rates you have on car payments, mortgages, student loans and even the credit cards in your wallet can help you prioritize payments and make smarter decisions. For example: If you locked in a fixed-rate mortgage more than two years ago, you may want to avoid aggressively paying it down or refinancing. Instead, you could continue paying the monthly premium and turn your attention to paying off credit card debt or other variable loan costs.

As talk of a recession and interest rate hikes intensify, gaining access to additional credit (whether by means of adding another credit card or applying for a line of credit) while your income is stable and you are fully employed could be an advantageous fail-safe. You can avoid using the available credit until you need it, while feeling confident you took steps now to shore up your finances for whatever the future may hold.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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