What Happens To Your Money In The Bank During A Recession

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So while we're 'technically' no longer in a recession, it's still completely normal to want to get yourself in a better financial position and tighten your belt. Discover how to get your debt under control, how to cut back on spending, and how to make sure you're getting a good deal on your financial products with our handy guide.

Focus on paying down your debt

Having a plan in place to pay off your debt is always important, but it's especially vital during a recession. There's a higher chance of being made redundant or having your hours cut back at that time, which could make it really difficult to meet your repayments.

When starting to pay down your debt, you should prioritise some debts over others.

Credit card debt and personal loans

If you have credit card debt or a personal loan, it's a good idea to focus on paying these off first. These products typically charge a higher interest rate than other credit products. While you might have this debt under control now, these could become difficult to pay down if you were to suddenly lose your income.

A balance transfer credit card allows you to transfer your debt over to a new card with a low or even 0% interest rate for a set period of time. Using a balance transfer credit card could save you money on interest and also help repay your debt quicker.

If you have several personal loans, you could consider combining these into one with a debt consolidation loan. This means you're not paying multiple sets of loan management fees.

Student debt (HECS or HELP debt)

This debt is less urgent, as you're not charged interest and it's simply indexed each year for inflation. This debt starts to be paid from your salary automatically once you earn above the income threshold, and it's taken from your pay before it even lands in your account (much like tax).

Because the inflation rate is so low right now, there's no urgent reason to rush into paying this off. If you've got money to spare, it's much more worthwhile to pay off any high-interest debt you have first. Once this is paid down, you should use any remaining money you have to start building up your emergency savings.

Build up your emergency savings

In times of economic uncertainty, it's really important to have some cash savings at hand. This is especially essential if you're a casual worker. If you're made redundant, you could face unemployment until the economy picks back up. This means no money is coming in, but you'll still need to meet your regular bills and ongoing payments.

Also, in times of economic uncertainty, we usually see big falls in the value of stocks and other assets, so cash is a much safer and less risky option.

While no one can predict how long the recession will last, as a general rule, it's a good idea to build up an emergency savings fund of three to six months' worth of living expenses. This means the amount you should aim to have saved will be different for everyone.

Here's how to start building up your emergency savings.

Calculate how much you need to save

The first step is working out how much you need to have in your emergency savings. This means calculating three to six months' worth of living expenses, which can sound daunting. A good way to tackle it is to look back on your transaction history over the last few months and make a note of all your living expenses. (Bonus tip: if you use the Finder App, it will automatically categorise many of your major expenses.)

Common examples of living expenses include the following:

Electricity, gas, Internet and phone bills
Mortgage repayments or rent
Health insurance payments, regular prescriptions and medication
Groceries
School fees, uniforms and supplies
Public transport costs, petrol and car registration

Keep in mind that living expenses means the things you buy that are essential to your day-to-day life, so things that are in the "wants" rather than "needs" category aren't included.

Examples of costs that usually aren't living expenses include the following:

Eating out and takeaway foods
Gym memberships or personal training (unless for medical/rehab purposes)
Alcohol
Entertainment costs like Netflix, Stan, Spotify or movie tickets
Holidays and travel

Create a budget and reduce spending

Once you've worked out your average monthly living expenses, it's time to put together a budget. Let's say you've figured out you need $2,000 a month for living costs, and you want to save up an emergency fund of four months' living costs. That's $8,000 you need to have in your emergency savings. How are you going to save this?

As a starting point, you need to trim your spending. It's likely that going through your past transactions has revealed some spending patterns you didn't realise you had. Perhaps you discovered you were spending more money on eating out than you thought you were? Or maybe you were surprised by how much money you spend each month on various streaming services? Work out where you're currently overspending and start to cut this down.

If you need more inspiration, here are 50 practical ways to reduce your spending and save money.

Save on your essentials

Some bills are unavoidable. Whether it's car insurance, home insurance, utilities bills or your phone plan, certain expenses just aren't going away - but you might be able to lower them. This can play a big role in reducing your spending.

Car insurance: We collected quotes from 12 well-known car insurers and found the cost of insurance can vary by more than $400 a year. Compare car insurance regularly, and you may be able to make a major saving.

Home insurance: Shopping around for your home insurance can also lead to big savings. We sought quotes from 8 different insurers and found a difference of $1,335 a year for the same house.

Health insurance: Are really making the most of your health insurance? If not, consider reducing your level of coverage. You can compare prices and benefits online to find a policy which best suits your needs.

Life insurance: Cheap life insurance does exist. Reconsider the payout amount you really need or look into cheaper providers. We found customers could save over $100 a year just by switching.

Utilities: Whether it's your electricity, gas, broadband, or phone bill, you might be able to bring the cost of your utilities down by comparing providers online.

Increase your income, if you can

While you're actively trying to reduce your spending, try to find ways to bring in more money if possible. This is especially important if you've already been following a budget and don't have many opportunities to reduce your spending further.

Here are a few options to increase your income:

Ask for a raise. If you haven't asked for a raise in a while, it could be a good chance to do this now. If you can pull together a solid case as to why you deserve an increase, you won't lose anything by asking.
Do part-time work. You could try to pick up some weekend shifts in a cafe or bar near you or do some freelance work after hours. You could even drive for Uber, rent out a spare room or start a side hustle.
Sell things. Sell items you no longer use or need on eBay, Gumtree or Facebook Marketplace for some extra cash.

If you need more inspiration and ideas, here are 22 ways you can make some extra cash.

Put your emergency savings in a safe place

Once you start building up your emergency savings, it's important you have a safe place to put it that's earning you a bit of interest. Here are a few options:

A high interest savings account. Savings accounts pay a small amount of interest on your balance. They often offer bonus interest when you can deposit a certain amount each month as an incentive to save. One benefit of a savings account is that you can access the money instantly if needed.

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A term deposit. Term deposits are a type of locked savings account. The benefit of term deposits is they pay a fixed interest rate that won't change for the life of the term. However, you can't access your money instantly if needed.

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Deposits up to $250,000 in savings accounts and term deposits with Australian banks are protected by the government, so if something were to happen to the bank (which is unlikely), your deposit would be safe. This is part of the Australian Government Guarantee Scheme.

The Pocket Money podcast explores how to recession-proof your money

Sort out your mortgage

If you already have a mortgage, then it's a good idea to start thinking about paying it down faster. A mortgage is the biggest debt most people have and will end up costing the average borrower hundreds of thousands of dollars in interest over the life of the loan.

Minimising your home loan debt is a great way to recession-proof yourself, but there are a few things to think about:

Do you have other debts?

Mortgage debt (along with a HECS-HELP debt) is typically less urgent than personal loan or credit card debt. You should prioritise the most expensive, high-interest debts first.

How high is your current home loan interest rate?

Refinancing to a lower interest rate can save you money without too much effort on your part. Check if your current rate is too high (rates have fallen well under 3% as of March 2020) and if so, apply for a new loan with a better rate. A home loan application can take hours of your time, but the potential savings make it worth considering.

Compare home loans rates and switch

Do you have an offset account?

If your home loan has an offset account, then you have a very flexible way of minimising your loan interest without losing money you may need later if you're affected by the recession.

An offset account functions like a bank account, but it's attached to a mortgage and the money earns no interest. Instead, the money offsets your loan principal (the amount you owe your lender). This means your interest charges are reduced. You still repay the same amount every month or fortnight, but more of the money goes toward your principal and less on interest. This means you repay the loan faster and pay less interest in the end.

And because the money is still sitting in a bank account, you can pull it out and spend it later if you need to. It's the ultimate rainy day fund: reduce your interest costs now and still have money to hand if you need it.

If your loan doesn't have an offset account, it might be worth refinancing to one that does and then putting some savings into it. It's a wise recession-proofing tactic.

Will property get cheaper during the recession?

Unfortunately, there's no guarantee that a declining economy automatically means declining house prices. It's certainly possible. No one truly knows what the future holds.

But if you actually look at property prices historically, Australia's last recession didn't result in a fall in property prices. It turns out that other factors, especially credit availability (how easy it is to get a loan) affect prices a lot more than negative growth in the broader economy. Or at least, that was the case then.

The sad fact is, property prices are high in Australia and wages haven't grown that much. Waiting for a recession to hit and then scooping up a property bargain is probably as unrealistic a dream as hoping to one day buy a house in Sydney.

How to invest during recession

In a recession some investments are hit harder than others. It's important to have an investment strategy that can handle a downturn so you avoid making last-minute, panic-driven decisions that could end up costing you.

Should you sell your shares?

Usually, stocks are among those hardest hit, so if you've got a large stock portfolio, it can be tempting to sell. But this isn't always the best idea. When preparing your investments for a recession, ask yourself these questions:

Will you need the cash? If you need the cash in a recession (for example if you have been made redundant and you don't have an emergency savings buffer), you could consider selling some of your shares, even though you could be taking a loss. However, selling your shares when the price falls locks in that loss of capital, so it could be better to focus on building up your emergency savings first before you resort to selling any of your stocks.
Can you manage without the cash? If you don't think you'll need the money any time soon, you could consider holding your investments and riding out the volatility. It could get worse before it gets better and it may take several years, but historically the stock market tends to go up over the long term.
Are you about to retire? If you're close to retirement you won't have as much time left to ride out the volatility and wait for the share market to recover like you would if you were in your 30s or 40s. In preparation, you could consider selling some of your positions before their price drops too much, and moving the money into a cash product instead. But remember, depending on your age, you could be in retirement for another 20 years or even longer. It's highly likely your stocks will recover in this time, and keeping some of your money invested in growth assets like shares will help your retirement savings last as long as possible.

Remember, like any global economic event, there are winners and losers in a recession and not all stocks will go down. So whether you sell or not will also depend on what you currently have in your portfolio.

Should you buy more shares?

During a recession, we usually see heavy falls in the stock market as investors sell their shares and move their money into low-risk cash products. However, some stocks won't be hit as hard and some will even rise in value. But one thing is certain: a recession presents some good buying opportunities for those who are prepared to do so.

Some shares that could go up in a recession include the following:

Consumer staples. Companies like grocery stores might not be as greatly impacted as other sectors since consumers still need to buy day-to-day items.
Healthcare. If the recession is brought on by a pandemic, we'll likely see some healthcare, medical research and biotech stocks rising.
Gold companies. Gold is a safe-haven asset that investors flock to in times of economic uncertainty, so in the lead up to and during a recession, we usually see the price of gold jump up. Read our guide on gold investing for more details.
Hedged ETFs. Some ETFs track market volatility and actually rise as the market falls and fall as the market rises. One example is BetaShares' BEAR ETF (BEAR:ASX).

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Tips to prepare your investment portfolio for a recession

Here are some tips to help you prepare and manage your investments before and during a recession.

Focus on diversification. As outlined above, while some investments will fall in value, others will outperform in a recession (and some will remain relatively flat or stable). One of the best ways to protect your portfolio from volatility is by not having all your eggs in one basket. Instead of selling your shares, consider holding your shares and instead buying some other assets that are likely to go up to minimise your overall losses.
Adopt a long-term mindset. Unless you're an active day trader, keep a long-term mindset for your portfolio. Yes, the market will fall from time to time, but it will almost certainly pick back up again and rise over the long term. The short-term volatility might be uncomfortable, but by focusing less on the day-to-day price movements, you'll be able to keep a level head, remain calm and stick to your course.
Create a shopping list of stocks to buy. When the market is falling and the economy is slowing, it can seem counterintuitive to invest more money into the share market. But during a recession, you'll find plenty of good-quality stocks trading for a significant discount, which presents some great buying opportunities. As part of your preparation for a recession, put some money aside and create a shopping list of what you want to buy so that when the price is right, you can act quickly. If you don't already have one, open an online share trading account so you're ready to trade when there's a good opportunity.
Stay informed, but ignore the hype. When the market is moving, whether that's falling sharply or rising quickly, there's going to be lots of hype. Everyone will have an opinion on what to buy and what to sell as well as on when the right time to buy will be. Remember, timing the market is a risky strategy that can be very costly, and at the end of the day, no one really knows for sure what the market will do next.

What about investing in property?

Collapsing stock prices and falling interest rates are making property look pretty attractive, right? There's certainly something reassuring about investing in brick and mortar. Property might not be the highest yielding investment, but it's typically a long-term game and relatively stable. Property is less exposed to short-term economic contraction and pandemics or disasters (unless you buy in an area that's disaster-prone).

The truth is though that no investment is ever guaranteed. And if you do decide that now's the time to invest in property, make sure you consider the following:

Invest for the long term. It is possible to "flip" a property for a short-term gain, but not everyone is able to pull this off and it's harder to do in a recession. Take your time, do your research and invest in the right property in the right location. Consider factors like demand, population growth, future infrastructure, proximity to shops and schools and overall desirability.
Buy in a "recession-proof" area. Imagine you'd bought an investment property in a mining town at the height of Australia's last mining boom. Expensive. And then all of a sudden, the boom's over and you're paying off an expensive property you can't find tenants for in a town with few jobs. Investing in towns or regions dependent on a single industry is very unwise during a recession. This is true for mining towns and holiday destinations, for instance.
Find the right loan. Australian investors can use their investment costs to minimise their tax bills. Finding the right type of investment loan is a key part of this strategy. And whatever strategy you go for, getting a lower interest rate on the loan will save you even more.
Don't try and time the market. Every investor wants a good deal, but buy low and sell high is for stocks, not property. Buy quality and hold for the long term is the most common property strategy.

What to do with your superannuation

It's not often as front of mind as our cash, personal investments and property, but your super are impacted by a recession too. Your superannuation is a big investment portfolio that's made up of a bunch of different assets, most notably shares (unless you've got a self managed super fund that's invested mostly in property). Importantly, your super could be one of the biggest assets you have by the time you retire.

To prepare for a period of economic downturn, the first thing to do is to make sure you've only got one super fund (this is actually important all the time, not just in a recession). If you've got multiple funds, you'll be paying multiple sets of fees which is unnecessary and will eat a big hole into your retirement savings. If you find you've got more than one fund, you should consolidate them. If you've just got the one super fund, it's still worthwhile comparing your fund with other options to make sure you're getting a good deal. Can you save on fees and costs by switching to another super fund?

Compare super funds

If you're happy with your current super fund and don't need to consolidate multiple accounts, the strategy you take with your super while preparing for a recession will depend on your age, your risk tolerance and your personal circumstances.

If you're young

If you're young and still a while away from retirement, generally the best thing to do with your super before or during a recession is to leave it alone. If you've got your super in a balanced or growth fund (which the majority of Australians do), your super will already be diversified across a range of assets.

This means that while shares might be falling, other assets will be doing well. So even if the share market has fallen 20%, the overall impact on your super won't be as significant. This is because the portion invested in other assets (like gold, bonds or property) will help outweigh some of this loss.

You might be tempted to move your super into a lower-risk cash option, but this can be more costly than you think. First, if you change your investments, you're realising and locking in the losses (this only happens when you sell; until then, the loss is just on paper).

Second, you risk missing out on the potential rebound when the share market picks back up, which it will (we just don't know when).

And third, a lot of people moved their super into cash investments during the global financial crisis (GFC) and simply forgot to move it back into growth options when the market started to recover. This means they missed out on a decade worth of strong share market performance following the GFC.

If you're near retirement

If you're close to or already in retirement, you'll have less time for your super to recover after a recession. However, this doesn't necessarily mean you should rush into changing your investments.

If you have your super in a balanced fund, a lot of these will automatically be adjusted in line with your age anyway. So it's likely that your super has already been gradually moving towards defensive assets and away from growth assets like shares.

You could consider moving some of your super into more conservative assets, but remember that you'll need growth assets like shares to ensure your super lasts as long as possible in retirement. Even if you're about to retire next year, most of your super will stay invested for the next 5, 10 or even 15 years.

Check your super insurance cover and beneficiaries

It's a good time to check what insurance cover is included in your super and to add or remove anything you think you do or don't need.

A lot of super funds offer income protection cover as an optional insurance cover, which could be good to have during a recession if you feel like your job is vulnerable. However, if you already have an existing income protection policy outside of your super, you may be doubling up on fees by also having it within your super.

While you're tidying up your super, it's also a good opportunity to check you've got your beneficiaries added. Your beneficiaries are who you want your super to go to in the event of your death, so it's really important to keep these up to date.

Need more help?

Taking control of your finances is daunting at the best of times. When facing a recession, it's even scarier. We hope that the information on this page helps you save money on your financial products and helps you make some good decisions.

If you need more help, the tables below contain competitive products, ranging from mortgages to savings accounts to super funds. And if you need more guidance on saving money, managing debt or need the services of a counsellor, check out some of these links.

If you are in financial distress, please read our emergency finance help information or call the National Debt Helpline on 1800 007 007.
Financial Counselling Australia can put you in touch with a financial counsellor.
Please know that whatever financial and emotional stress you're suffering, you are not alone. Call Lifeline Australia on 13 11 14 if you need help.

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