Saving During a Recession

Don't let an economic recession do more damage than it has to. You can still keep saving even when times are tough.

In a normal economic environment, saving money is like an extended hike uphill. But when you add in recessionary pressures, that hike turns into a tortuous, stifling climb in 100-degree heat.

A recession can quickly derail progress toward your financial goals. Inflation is driving prices up, the value of your investments is going down, and you may be facing an uncertain job environment. Things are even more stressful if your planned retirement is just around the corner.

Retirement challenges

Your top priority right now should be to relax. Since the market always moves in cycles, you can be confident that your portfolio is likely to recover if you don't do anything rash. Unfortunately, if you had intended to retire soon, you really don't have much flexibility to wait for the recovery. Experts say that you should have one- to two-years of living expenses set aside in a money market fund before you retire. This cash cushion allows you to ride out economic cycles without having to sell off your core, income-generating investments. If you need to dip into your cash fund during retirement, you can rebuild it later when the economy starts to recover, using income generated from your best-performing holdings. If you don't have the one- to two-year cushion right now, you may just have to keep working until you do.

Staying on the savings path

The big challenge is to stay on track with your savings and debt repayments, even as recessionary pressures take their toll. You may be tempted to borrow against your 401(k) to make ends meet-but consider this option only as a last resort. A better strategy is to rein in household spending by doing without some indulgences until the economy recovers. For example, you can:

• Skip your tropical vacation and go camping instead.
• Start clipping coupons and buying generic groceries and household products.
• Cook dinners at home and pack your lunch, rather than eating out.
• Plant your favorite vegetables and herbs in your backyard.
• Postpone big projects and large purchases.
• Reduce your mortgage payment by downsizing your home.
• Trade in your gas guzzler for a more efficient vehicle.
• Arrange a carpool to work.
• Get a part-time job, and use the money to pay off debt.

Staying focused on saving during these tough times won't be easy, but the headway you make now will have you better prepared when the next down cycle hits. You can pretty much plan to see another economic recession in your lifetime. You're far more capable of navigating the hike to financial security now, while you're working, than once you retire. So be smart and live conservatively...at least until the economy bounces back.