How to save money in a recession

Economists define a recession as two consecutive quarters in an economic decline, but for some people, that doesn't mean much. It can feel like we're in a recession even when some indicators remain strong, such as job growth. Although people's perceptions about a recession may not be entirely accurate, there's no doubt inflation can be a real pain in the wallet. If every trip to the grocery store or gas station costs an extra $50, your savings can easily take a hit, especially if saving hasn’t been a priority.

At its core, saving money in a recession requires discipline and a laser focus on the future. When you start hearing people on the news talk about a recession, it's easy to feel like you must do something now. However, staying the course — especially if you have a thoughtful approach — may be the best route.

Stock your emergency fund.

With recessions come financial uncertainty. Whether their fears are justified, people worry about having to take a pay cut or losing their job, missing a house payment or even getting a new car battery if it dies unexpectedly.

But you can feel confident in the face of uncertainty if you have an emergency fund. Not only is an emergency fund essential for your financial stability, but it also helps with your general peace of mind. Once you've saved three to six months' worth of living expenses, you know you have a cushion if you were to unexpectedly experience a life change.

If you do the math and feel overwhelmed by saving that much, don't let that feeling cause you to give up. Start by saving what you can, with an initial goal of $1,000. Then build from there. Even a small amount saved on a recurring basis can make a difference in the long run.

Pay yourself first.

This advice applies even in the best of times, but it's especially true when you're planning to save money in a recession.

Whether you're putting your savings in an emergency fund, toward your retirement or in an account you've specified for your next vacation, automatically saving a predetermined portion of your paycheck keeps you from making impulsive emotional decisions you could regret later.

During a recession, there's a lot of confusion and mixed facts and figures, which can cause cognitive dissonance. Having a plan and staying the course can help overcome those contradictory thoughts.

Many banks have free online tools and resources that can help you save money routinely and without much effort.

• Recurring transfers tools. These tools automatically transfer money from regular deposits to your chosen account. This typically happens with a paycheck that’s deposited into a checking account. From there, you can decide which recurring deposits to use and how much gets transferred to your savings account.
• Savings notification tools. These typically analyze your checking account balance every few days to see if a small amount, usually less than $10, can be automatically transferred to your chosen savings account. Often, this notification can come via text message to help keep savings top of mind.
• ATM rebates. These days, online banking is the norm — which could mean ATM fees for cash withdrawals. Fortunately, many banks offer ATM fee rebates up to a certain dollar amount. Whether it’s manual or your bank has an automatic feature to transfer those rebates to savings, these tools can help you pocket money that’s already been spent.
• Tax refunds tools. These types of tools help you save a portion of your tax refund when it is directly deposited into your bank account.
• Change round up. Like how your grandparents had jars of coins laying around the house, spare change programs automatically round up your purchases to the nearest dollar, allowing you to incrementally save as you spend.
• Credit card rewards. While credit cards’ rewards programs can be quite overwhelming, some offer cash back opportunities. This can provide an unexpected boost to your savings account.

Learn more about how our free tools can help you save.

Take a look at ‘the big three.’

While basic advice about how to save money can be helpful, it’s important to understand your personal situation so you can focus your efforts where it can make the biggest impact.

For example, cutting back on your daily coffee run adds up, and it’s certainly money you can put toward savings. But start thinking through whether you can make dents in your biggest expenditures.

Studies reveal that, on average, people spend most of their money in three categories: housing, transportation and food.

If you’re single, for example, the housing costs can take up an even larger percentage of income. So if you're in a situation where you can get a roommate to share that cost, you're looking at real savings. Most people can't just snap their fingers and move, but if you're in a transition period, it's a good time to evaluate housing and roommate options.

The same goes for transportation. Does your family have a lifestyle that would allow you to downsize a vehicle? Could you carpool or take advantage of mass transit? If you have a car payment, you might even be able to save money by refinancing your auto loan.

When it comes to food, the third biggest expense, cooking at home is one of the most significant ways you can save money. Maybe you’re not a big coupon user, but if you can find a love for cooking, it can generally be cheaper than eating out.

Keep an eye on your credit score.

If you have a higher credit score, you'll generally qualify for a lower interest rate and better terms. Considering that most people spend most of their money on housing and transportation — and that buying a house or a car starts with a credit check — it shows that a better credit score can help you save money.

Want to build good credit? Start with our guide to getting it and keeping it.

Recession-proof your finances.

There's usually no need to worry about whether your money is secure in a bank that’s FDIC-insured. Even during a recession, bank deposits that are FDIC-insured are secure up to FDIC-insured limitsOpens in New Window.‍ ‍ ^{See note 1}

During a recession, the more realistic concern isn't whether your money is secure, but if it's earning enough to beat inflation. If your personal situation, risk tolerance and capacity call for it, consider bank savings accounts and certificates of deposit, or CDs.

At the end of the day, it’s all about having a process. Combine a good plan with consistent habits and you’ll have the foundation to navigate any economic situation that life throws your way.