Senior Editor
A recession can wreak havoc on your finances. So it’s understandable if you’re worried by recent headlines. Economists are increasingly pessimistic, with those polled for Bankrate’s Second-Quarter Economic Indicator putting the odds of a recession at 52% in the next 12 to 18 months.
If you’re worried about a recession, there are steps you can take to safeguard your money. But you’re probably facing some tough choices since your paycheck will only stretch so far.
One big decision to make: Should you save money or pay down debt to prepare for a recession?
There’s no hard-and-fast rule that determines whether you should save or pay off debt when you’re worried a recession is imminent. Often, the best move is to split any extra money you have in your budget between savings and reducing your debt.
Financial planners typically recommend a six-month emergency fund, but that’s just a general rule. The exact number you should aim for depends on your personal circumstances. You may be able to get away with three months’ worth, for example, if you’re young and healthy and you work in a field that’s relatively insulated from layoffs, like healthcare or education.
A bigger emergency fund has some obvious advantages: It buys you more time to look for a job should you get laid off. You’re also less likely to need to raid your retirement funds early to meet your short-term needs. Doing so can be costly, not just because of the taxes and penalties, but also because you may be selling investments while they’re down.
Of course, if you’re affected by a recession, you’ll want your bills to be as low as possible. Paying off debt will free up money in your monthly budget and save you money on interest. If you’re paying down credit cards, your savings will be especially significant, given that the average annual percentage rate (APR) is currently around 15%.
But here are some situations when you may want to prioritize saving over debt payoff, or vice-versa.
Consider making savings your top goal in the following situations — but keep making minimum debt payments, of course.
An emergency fund should be liquid, meaning you can access it without penalty at any time. Safe options include savings accounts and money market accounts.
Paying off debt before saving more money makes sense if these circumstances apply.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]
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