Since 2020, the U.S. economy has experienced record-high stock market returns, a global pandemic, a short but incredibly sharp recession, skyrocketing inflation and now, the highest interest rates since the 1990s. So it’s understandable if you’re struggling to save money and worried about protecting what you have.
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Even though the events of the past three years might have left your head spinning, they’re part of an established economic cycle. From bull and bear markets to financial crises and recessions, these situations will occur over and over again. The problem is it’s impossible to predict exactly when and how they’ll unfold.
So what can you do to save money at different stages of the economy — and different stages of your financial journey? GOBankingRates reached out to the experts to find out.
How To Save in a ‘Normal’ Economy
Even though things have seemed pretty tumultuous over the past few years, most of the time, the economy is slowly and steadily growing. In fact, since World War II, the economy has been growing about 85% of the time, according to Brian Seay, CFA and founding partner at Capital Stewards.
“This is the natural state of the U.S. economy,” Seay said. During these periods, we see moderate gross domestic product (GDP) growth of 2% to 3% per year, a strong job market and a rising stock market. In general, Seay added, consumers across all income statuses have money to spend and save.
During these normal periods of economic growth, it’s a great time to get your money management fundamentals in place and prepare for less advantageous times.
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If You’re Just Getting Started Saving: Focus On Building Good Habits
First things first, you need to be saving something for the future — even if you have to start small, according to Michelle Francis, financial planner and founder of Life Story Financial. For example, maybe you decide to avoid dinner out one night a month, and instead put that $25 to $50 away in a retirement savings account.
The goal is to get into the habit of saving. “And then psychologically, once you start seeing how quickly that account balance can grow, it can really motivate you to save even more,” Francis said. “It adds up over time through the power of compound interest.”
If You’re Living Paycheck-to-Paycheck: Work on Creating an Emergency Fund
When funds are tight, having an emergency fund in place should be your priority. That way, if your car breaks down or your kid has to visit the emergency room, you don’t have to rely on high-interest debt to get by.
Francis recommends aiming for three months’ worth of expenses to start. That’s especially true if the work you do is marketable and you can find a job fairly quickly if needed. “For folks that are maybe a little older or more specialized in their career field, I do recommend six months’ savings,” she said.
If You’re Comfortable and Looking To Maximize Savings: Get Your Employer Match
Once you have an emergency fund in place, you can work on growing your long-term savings. That should start with an employer-sponsored retirement savings account, such as a 401(k) or 403(b), if you have access to one.
Ideally, you should aim to save around 10% to 15% of your income for retirement. However, if that goal is a little too lofty at the moment, at least contribute enough to receive your full employer match, if one is offered. “That’s free money,” Francis said.
If You’re Wealthy: Max Out Your Retirement Accounts
Seay noted that when the economy is growing — which again, is generally most of the time — it’s also the best opportunity to invest in the stock market. “What’s going to drive the most return over the long-term is to start investing in low-cost index funds or mutual funds to earn stock market returns over long periods of time, and to do that when the economy is performing well,” Seay said.
The best way to maximize those returns further is to contribute to a tax-advantaged retirement account, up to the maximum allowed. “For people that are really lucky and are able to max out their 401(k) and save even more, that’s the point at which they can think about a taxable investment account,” Francis added.
How To Save in a High-Growth Economy
As the economy reaches the end of its moderate growth period, it often picks up steam. In this type of high-growth environment, the job market is really strong, and it’s easier to find high-paying roles. The downside, Seay noted, is that inflation may be stronger in those periods of time, and incomes need to go up in order to keep pace with higher prices.
If You’re Just Getting Started Saving: Take Advantage of High-Yield Accounts
Even though high inflation puts pressure on your budget, one of the bright spots is that the Federal Reserve often raises its target rate to help bring it back down. That causes banks to raise their interest rates on deposit accounts.
“During a period like we’re in right now, where inflation has been going up… having your emergency fund in a high-yield savings account is a great place to be,” Francis said. Right now, in fact, some of the best high-yield accounts are offering upwards of 4% to 5% APY. This can help give your savings a boost and protect it from market risk without having to lock your money into long-term CDs or bonds.
If You’re Living Paycheck-to-Paycheck: Look for Found Money
If your budget is feeling particularly crunched, focus on saving more when the opportunity arises. Francis recommends taking advantage of “found money” and setting that aside.
For example, maybe you return a purchase at the store, or you receive a tax refund. Or perhaps you earn cash-back points on a credit card. Instead of spending the cash, you can put it in your savings and your regular budget won’t know the difference.
If You’re Comfortable and Looking To Maximize Savings: Automate
Saving money can be psychologically painful, especially when inflation is eating into your extra cash. So it helps to take the mental part out of the equation by automating it, whether you have a portion of your paycheck automatically deducted for savings or create a recurring transfer from your checking account to your savings.
“The more you can automate those savings, the better,” said Dave Zaegel, CPA, CFP and host of the Retire With Confidence podcast. “The less you have to think about it, the better… It just happens, and it builds over time.”
You may even be able to avoid monthly bank fees or receive a boost on your interest rate by setting up a regular, automatic transfer. Of course, it’s important to be sure you maintain a buffer in your checking account so you don’t accidentally overdraft.
If You’re Wealthy: Stick With the Stock Market
Seay said that it can often feel counterintuitive, but you shouldn’t really change your strategy because the economic landscape has changed. “A lot of times when inflation is high, people tend to look at things like Treasury Inflation-Protected Securities (TIPS) or different types of investments to sort of hedge against inflation,” he explained. “But what you actually see is that by the time inflation is happening, those types of advertised inflation-protected securities don’t perform as well.”
The best way to hedge against inflation? “Just invest in the stock market,” Seay said. “Because as inflation goes up, the prices that companies charge increase and their earnings increase.” Hence, their stock values increase, too.
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How To Save During a Recession
Periods of high growth aren’t sustainable over the long-term and usually culminate in a shock to the economy — think: a global pandemic or geopolitical events. Then a recession follows. This is generally marked by negative GDP growth over two consecutive quarters.
But from a consumer perspective, Seay said it often also means job instability, including reduced hours or even layoffs. “Earnings go down in recessions, and all of that makes it harder to save,” Seay said.
If You’re Just Getting Started Saving: Prioritize That Rainy Day Fund
Hopefully, you already developed a strong savings habit and started setting some money aside for exactly this situation. Even so, if you don’t have much saved up yet, it’s a good idea to stay focused on your short-term needs.
“Especially during a recession, if I lost my job or had my income go down in a significant way that was unexpected, I would prioritize having a savings account with cash in it that could cover some of my expenses and make sure that was set up properly before I invest in retirement accounts or in other types of long-term investments,” Seay said.
If You’re Living Paycheck-to-Paycheck: Know That It’s Okay to Take a Break
Contrary to common advice, Seay said it’s actually okay for people to save a little bit less when their income goes down. That’s especially true if you’re saving and investing through growth periods of the economy.
“We live in the real world,” Seay said. “Income fluctuates, and that makes it harder to meet your budget.”
In other words, it’s better to save a little bit less when the economy is going through a recession, rather than to pile up high-interest debt just to try to continue to save because someone said you should.
If You’re Comfortable and Looking To Maximize Savings: Open a Roth IRA
With a traditional IRA, you get a tax deduction when you make the contribution and it grows tax-free, but then you are taxed when you take money out of the account. “A Roth IRA is the complete opposite, where there is no tax deduction for making the contribution, but then it grows completely tax-free and is tax-free to withdraw,” Zaegel said.
This is a particularly beneficial place to put high-growth securities. “Generally, we see people being more aggressive with the funds that they have in the Roth [IRA],” Zaegel said. “If we’re investing for the long-term and we want a greater growth opportunity, we want to do that in a tax-free account.”
The catch: If your income exceeds certain limits, you won’t be able to contribute directly to a Roth IRA. That said, Zaegel said you may still be able to get the money into one over time by putting your money into a traditional IRA and then converting it into a Roth IRA. The tax bill on this process can get pretty high, however, so it’s best to do it when the market is down and reduce your overall tax burden as much as possible.
If You’re Wealthy: Stay the Course
The advice here might sound like a broken record, but sometimes the best thing to do is the simplest. Especially because timing the market is notoriously difficult — if not impossible — to do. It makes more sense to come up with a plan for saving and investing your money that holds up regardless of the current state of the economy.
“When it comes to savings, the simpler you can keep it, the better,” Zaegel said. “It’s more executing it than actually strategizing on it.”
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This article originally appeared on GOBankingRates.com: How To Save Money in Every Economy
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