Where to Put Your Money During a Recession: Low-Risk Investment Options

With talks of a possible recession looming, it’s natural to feel concerned about where to place your money. A recession is typically defined as at least two consecutive quarters of negative gross domestic product (GDP) growth. During such times, unemployment rates tend to rise, and the stock market often takes a hit. While the future remains uncertain, it’s wise to consider low-risk investments to safeguard your finances. Here are some options to consider.

High-Yield Savings Accounts

High-yield savings accounts offer higher annual percentage yields (APYs) compared to traditional savings accounts, making them an attractive option. Although interest rates generally drop during a recession, a high-yield savings account remains a viable choice.

Pros of High-Yield Savings Accounts

• Above-average yields: High-yield savings accounts can significantly boost your net worth. Some accounts offer interest rates exceeding 5%, which is much higher than the average rate for traditional savings accounts, typically under 1%.
• Easy access to funds: These accounts offer liquidity, making them ideal for emergency funds or short-term financial goals. Unlike certificates of deposit (CDs) and tax-deferred retirement accounts, high-yield savings accounts do not impose penalties for early withdrawals.
• Safety from stock market volatility: Your deposits in a high-yield savings account are not affected by stock market fluctuations. Additionally, your funds are insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per depositor, per institution.

Cons of High-Yield Savings Accounts

• Limited withdrawals: Some financial institutions cap the number of free electronic transfers and withdrawals you can make each month, usually at six.
• Potential fees: Some high-yield savings accounts may charge fees, such as overdraft fees or penalties if your balance drops below a certain amount.

Certificates of Deposit (CDs)

With a certificate of deposit, you earn interest by leaving your money in the account for a specified term. While early withdrawals may incur penalties, the higher-than-average APYs can be appealing during a recession.

Pros of CDs

• High APYs: CDs often offer higher APYs than many high-yield savings accounts.
• Multiple term options: Using strategies like CD ladders or CD barbells allows you to take advantage of different term lengths and interest rates, providing liquidity as each term expires.
• Guaranteed returns: If you keep your money in a CD for the full term, your interest rate is guaranteed. CDs are also insured by the FDIC or NCUA.

Cons of CDs

• Liquidity limitations: Early withdrawal penalties can make CDs less appealing for money you may need in the near future.
• Minimum deposit requirements: Some CDs require a minimum opening deposit, typically $500 or more. If you have less than that, a high-yield savings account may be a better option.

Money Market Accounts

A money market account earns interest like a savings account but often comes with a debit card or checkbook. It’s a low-risk investment that can be beneficial during a recession.

Pros of Money Market Accounts

• Accessibility: Money market accounts offer liquidity, allowing for electronic withdrawals and transactions. You can also write checks and potentially have a linked debit card.
• Competitive interest rates: These accounts may offer higher rates than checking and traditional savings accounts, and they could be comparable to some CDs and high-yield savings accounts.
• Peace of mind: Money market accounts are insured by the FDIC or NCUA, providing safety for your funds during a recession.

Cons of Money Market Accounts

• Limits on withdrawals: Convenient withdrawals may be limited to six per month, and what counts as a convenient withdrawal can vary from bank to bank.
• Potential fees: Some money market accounts impose fees if you don’t meet the minimum balance requirements or charge maintenance fees.

Bonds

When you purchase a bond, you’re essentially loaning money to the issuing company or government entity. You’ll receive your money back, plus interest, when the term ends. Bonds can be a reliable investment during a recession.

Pros of Bonds

• Low risk: Bonds, especially those backed by the federal government, are considered low-risk investments.
• Diversification: Including bonds in your investment portfolio can help you stay diversified. If a recession negatively impacts the stock market, bonds can provide steady returns to offset some losses.

Cons of Bonds

• Lack of liquidity: Selling a bond before it matures can result in fees and potential losses. Changing interest rates can also affect the bond’s value.
• Modest returns: While bonds can help grow a portion of your savings, their returns are usually less robust compared to stocks. Money market accounts, high-yield savings accounts, and CDs often offer higher interest rates than bonds.

The Bottom Line

If you’re wondering where to put your money during a recession, consider high-yield savings accounts, money market accounts, CDs, or bonds. These options provide safe places to store your savings. It’s important to note that a recession doesn’t mean you should pull all your money out of the stock market. Staying invested and continuing to contribute to your retirement accounts is wise. Diversifying your savings and investment accounts can help cushion the blow of any losses to your invested funds during a recession.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We are committed to providing you with the best mortgage solutions tailored to your needs.