Where Should I Put My Savings in a Recession?

1. High-Yield Savings Account

High-yield savings accounts offer higher annual percentage yields (APYs) than traditional savings accounts, making them a more attractive option. Interest rates in general tend to drop during a recession, but a high-yield savings account is still worth considering.

Pros of High-Yield Savings Accounts

• Above-average yields: A high-yield savings account can help increase your net worth. Some currently have interest rates that exceed 5% (though this could significantly decrease in the event of recession). That's much higher than the average rate for a traditional savings account, which is typically under 1%.
• Easy access to funds: Liquidity is another benefit of a high-yield savings account. It's an ideal spot for your emergency fund, and it can also be a great place to save money for short-term financial goals. Certificates of deposit (CDs) and tax-deferred retirement accounts, on the other hand, impose penalties for early withdrawals.
• It's safe from the stock market: If a recession causes short-term market volatility, you won't lose money on your high-yield savings deposits, unlike investing in the stock market. The APY will be working for you regardless (though it could be lower than the rate you had when you opened the account). Your funds are also 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

• Convenient withdrawals may be limited: Some financial institutions limit how many free electronic transfers and withdrawals you can make each month. It's usually capped at six, but every bank and credit union has its own rules.
• Potential fees: Some high-yield savings accounts charge fees. That might include overdraft fees or penalties if your balance drops below a certain amount.

2. CD

With a certificate of deposit, you'll earn interest for leaving your money in the account. You'll likely be penalized for making withdrawals before the term ends, but their higher-than-average APYs can be attractive during a recession.

Pros of CDs

• High APYs: This is the main draw of putting money in a CD. CDs can have APYs higher than many high-yield savings accounts.
• The ability to leverage multiple terms: Using a CD ladder or CD barbell allows you to take advantage of different term lengths and interest rates. It involves staggering your money across different CDs that have varying maturity timelines. You'll gain liquidity as each term expires.
• Guaranteed returns: If you keep your money in a CD for the full term, your interest rate is guaranteed. Like savings accounts, CDs are also insured by the FDIC or NCUA.

Cons of CDs

• Liquidity limitations: Even with high APYs, early withdrawal penalties can make CDs less appealing than other deposit accounts. They aren't the best for money you expect to need in the near future.
• Minimum deposit requirements: Every CD is different, but some require a minimum opening deposit. This is typically $500 or more. If you have less than that, you may be better off with a high-yield savings account.

3. Money Market Account

A money market account earns interest like a savings account, but most come with a debit card or checkbook as well. It's a low-risk investment that can make sense during the turbulence of a recession.

Pros of Money Market Accounts

• Accessibility: Money market accounts stand out for their liquidity. It's relatively easy to access your account through electronic withdrawals and transactions. You can also write checks and potentially have a linked debit card.
• Competitive interest rates: Money market accounts may have higher rates than checking and traditional savings accounts, and they could be as high as some CDs and high-yield savings accounts.
• Peace of mind: Money market accounts have the same FDIC or NCUA insurance coverage as CDs and savings accounts. That can keep some or all of your funds safe during a recession.

Cons of Money Market Accounts

• Limits on convenient withdrawals: This may be limited to six per month. What counts as a convenient withdrawal can vary from bank to bank. For example, some may include ATM withdrawals in this total while others don't.
• Potential fees: Some money market accounts impose a fee if you don't meet the minimum balance requirements. There might also be a maintenance fee.

4. Bonds

When you purchase a bond, you're loaning money to the company or government entity that issued it. You'll get your money back, plus interest, when the term ends. Bonds can be a viable investment if you're looking for a reliable return during a recession.

Pros of Bonds

• Low risk: As far as investment risk goes, bonds are on the lower end of the spectrum—especially those that are backed by the federal government.
• Diversification: Having bonds in your investment portfolio can help you stay diversified. If a recession negatively impacts the stock market, bonds can provide steady returns that offset some of those losses.

Cons of Bonds

• Lack of liquidity: If you need cash and sell a bond before it matures, you could end up losing money to fees. Changing interest rates can also influence how much bonds are worth.
• Modest returns: Bonds can help grow a portion of your savings, but returns are usually less robust when compared to stocks. Money market accounts, high-yield savings accounts and CDs tend to offer higher interest rates than bonds.

The Bottom Line

If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings.

It's worth noting that a recession doesn't mean you should pull all your money out of the stock market. On the contrary, it's wise to stay invested and continue contributing to your retirement accounts. But having your money spread out across a variety of savings and investment accounts can help cushion the blow of any losses to your invested funds during a recession.