Should You Keep Your Money in the Bank During a Recession? Experts Weigh In
After a strong year of growth in 2023, the U.S. economy is now showing signs of slowing. J.P. Morgan Research raised the probability of a U.S. and global recession by the end of this year to 35% — up from 25% in its mid-year outlook. Additionally, the Bureau of Labor Statistics reported that the country added 818,000 fewer jobs than previously estimated from March 2023 to March 2024. But what does this mean for your finances?
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With these indicators pointing to a cooling economy and a potential recession, many people are now questioning whether keeping their money in the bank remains a safe decision.
Is My Money Safe in the Bank During a Recession?
Is your money safe to keep in the bank during a recession? Taylor Kovar, CFP, founder and CEO of 11 Financial, believes that it is.
“Banks are generally considered the safest place to keep cash, since accounts insured by the FDIC (Federal Deposit Insurance Corporation) protect individual deposits up to $250,000,” he said.
Michael Collins, CFA, founder and CEO of WinCap Financial, agreed. “While it can be tempting to withdraw all your funds from a bank and keep them at home, banks are typically more secure and offer protection against theft or loss. Plus, keeping money in a bank allows for easier access to funds if needed for emergency expenses or unexpected bills.”
However, if you have significant savings beyond the $250,000 insured limit, you might want to explore other strategies to diversify and protect your wealth.
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What Happens to Banks in a Recession?
According to Pew Research data, the number of U.S. bank failures typically peaks during periods of economic decline. For example, between 1930 and 1933, when the Great Depression ravaged the country’s banking industry, more than 9,000 banks failed across the United States. Pew Research Center found that depositors in these failed institutions lost more than $1.3 billion — a whopping $27.4 billion in today’s dollars.
Banks can fail due to many reasons, but they typically fall into a few broad categories:
Panic withdrawal: When customers simultaneously withdraw their money from deposit accounts for fear that the bank will become insolvent
Poor asset quality: Having too many bad loans or assets that fall precipitously in value
Asset-liability mismatch: Having a mismatch between what the bank can earn on its assets and what it has to pay on its liabilities.
In response to the thousands of bank failures during the Great Depression, the U.S. government established the Federal Deposit Insurance Corporation in 1933 to protect consumers and their deposits. According to the FDIC, no depositor has lost a single cent of insured funds since its inception in 1934.
How Does the FDIC Protect Your Money in the Bank?
In the unlikely event that your bank fails, the FDIC deposit insurance will cover the balance of your account, dollar-for-dollar, up to the insurance limit, including your deposits and any accrued interest through the date of your bank’s closing. The FDIC protects checking accounts, negotiable order of withdrawal (NOW) accounts, savings accounts, money market deposit accounts, certificates of deposit, cashier’s checks, money orders and other official items issued by a bank.
Note that you don’t need to apply for FDIC insurance. You’re automatically covered when you open an account at an FDIC-insured institution. Before trusting your hard-earned money with a bank, use the FDIC’s BankFind tool to make sure the financial institution is insured.
Ways To Safeguard Your Money During a Recession
Even though money kept in a bank account is generally safe during a recession, these strategies can provide peace of mind if you’re worried about maintaining and growing your wealth in an economic downturn.
Diversify Your Money
One way to safeguard your finances during a recession is to diversify your accounts.
“I’d recommend putting your cash in high-yield savings accounts, certificates of deposit (CDs) or money market accounts that are low-risk but offer better returns than standard savings accounts,” Kovar said. “This way, your money can grow even in a low-interest environment.”
Plus, these accounts are all protected by the FDIC, so your funds are safe as long as you stay below the $250,000 insurance limit.
Keep Some Assets in Cash or Cash Equivalents
Liquidity is crucial in uncertain times.
“I’ve seen people struggle during a recession because their assets were too tied up in investments. This is why I suggest keeping some of your money in cash or in easily liquidated instruments like Treasury bills,” Kovar said.
Keeping your savings liquid is particularly important during a recession, because if you’re laid off from your job — which could happen during an economic downturn — having a cushion of easily accessible funds can be a lifesaver. According to a study from the Consumer Financial Protection Bureau (CFPB), as of January 2023, only 27.1% of households could cover expenses for more than six months, while 19.5% could cover expenses for less than two weeks if they lost their main sources of income.
Consider Safe Havens Like Gold
While not a traditional savings method, precious metals like gold tend to retain value during recessions and can be a solid place to invest your cash and safeguard your money amidst economic uncertainty.
You can invest in gold by purchasing physical gold, such as coins or bars, or you can invest in gold ETFs or mutual funds that hold gold assets or gold-related stocks. A riskier way to invest in gold is trading gold futures or gold options contracts, which is a form of speculative investing.
The Bottom Line
If you’re worried about your financial security during a recession, take action now to strengthen it, so you’re not caught off guard if the economy takes a dive.
Low-risk options, like high-yield savings accounts, money market accounts and CDs, can all keep your money safe while allowing you to earn interest that could come in handy if things get challenging. For added security, consider spreading your funds across several banks. This way, you can diversify your savings while maximizing your FDIC deposit insurance protection.
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This article originally appeared on GOBankingRates.com: Should You Keep Your Money in the Bank During a Recession? Experts Weigh In
