How to Save During a Recession

Saving during a recession isn't easy. So many families have at least one adult out of work. Even those of us lucky enough to have kept our jobs aren't getting raises. With inflation continuing apace, we all have less money then we're used to. We've all lost money on our retirement investments, and returns on everything from stocks to savings have plummeted.

No, saving during a recession is not easy. But it's never been more important. In flush times financial experts recommended keeping a three-month emergency fund in your savings account. Today, they're suggesting pegging your emergency fund to the unemployment rate, setting aside one month's cost of living for every percentage point of unemployment. Some are going further and recommend keeping up to a year's living expenses in a high yield savings account.

That's a lot of dough. Few people have a year's salary in cash savings; for most of us that probably sounds like an unreachable goal.

How can you save that much when your salary (assuming you still have one) stretches less and less far?

Here are some savings tips to help you build savings during a recession:

• Cut your consumption. Blogger Katie Wolk-Stanley of the Non-Consumer Advocate likes to say, "use it up, wear it out, make it do or do without." Start by cutting out recurring expenses like magazine subscriptions and cable TV. Next, go after shopping expenses. Look for ways to save on groceries, clothing and household goods. Put the brakes on luxuries purchases like new electronic equipment, books and games. Seek out free entertainment and use your local library instead.
• Save your savings. A dollar saved is only truly saved if you don't immediately spend it on something else. When you cut $30 from your cable bill, put that money directly into a high interest savings account. Ditto the dollars you don't spend at the grocery store. While each bit of savings may seem small, they'll add up quickly. Put that money in savings and you'll see it grow into financial security for your family.
• Prepare for the worst. How would you have to live if your job evaporated in the next wave of economic troubles? Try to scale back your lifestyle "as if" you were living that worst-case scenario, and save the extra money you're earning now as an insurance policy against that eventuality. Living well below your means means you'll need less if you're income is pulled out from under you. This is the best insurance against financial catastrophe.
• Protect yourself with new skills. There's one place not to skimp during a recession, and that's on your career. Now's a great time to learn a new skill, pursue the master's degree you've been putting off, or start a side business. As long as you're not spending money you don't have, go ahead and invest a little in yourself. You'll make yourself a more indispensable employee, and more attractive to future employers should your current job fall victim to the economy.

Once you've found money to save, set up an automatic deposit to your savings account each month. If you get paid via direct deposit, you can have the money sent directly into your savings account.

Since interest rates are low right now, you'll have trouble earning much of a return on your savings. Don't settle for the interest rate your local bank offers you. Compare savings account rates until you find the best one available to you. It's not worth it to chase interest rates every time they fluctuate a little, but you don't want to let your money languish in an account that's earning only 0.5% when you could be getting 2.15% from an online bank.

Even a low interest rate is better than none, though, and building up a cash cushion is the best thing you can do for yourself when everything from stocks to real estate to employment is so uncertain. Keep these good savings habits as the economy recovers, and you'll be way ahead of the game.

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