Interest rates are moving upwards, and they can affect us positively and negatively. As safe securities like treasury bonds and Series “I” Bonds increase their yields, prices for risk assets (like stocks and crypto) can decrease.
That’s why it’s good to have exposure to many types of asset classes (real estate, bonds, stocks, cryptos, automated business, royalties).
On a positive note, interest rates on high-yield savings accounts are now over 3%. This is a massive amount of free money for parking your savings. But how can this help us beat the recession?
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What is a recession? A recession can mean many things, but ultimately it means compressed spending across multiple asset classes.
This means businesses will cut jobs, housing prices will fall, consumer spending will dry up, and budgets will shrink. All in all, it’s a miserable time all around.
We will also deal with sticky inflation during the next recession. We call this double whammy of slow growth and high inflation “stagflation.”
Inflation and recession mean two things for the average person: 1) save more and 2) spend less. A high-yield savings account can help with the first part, and a budget can assist with the second.
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Budgeting with the best. I am a huge fan of budgeting for financial freedom. We will need to keep budgets flat or even decrease them to beat the recession.
This means that you need to spend less on things that cost more. How do you do this? You will need to purchase fewer items while going out less.
You set your living conditions, so living below your means is a personal choice. Let’s look at a quick example.
A quick example. Let’s say your household food budget was $800 a month in 2019. Trying to buy the same amount of food may cost $1,600 today (late 2022).
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However, to beat the recession, your budget should be around $1,000. What are some ways to achieve this level of spending?
You can do some couponing, shop at discount stores, or eat less. I know parents (including myself) buy too many optional things for our kids.
We want them to have these fantastic options, but we must reduce these choices during a recession. We all pay the price somewhere, and saving for our children’s future is a top priority.
We can also start a small garden. I buy a salad every day of the week because I don’t have a garden. If I could grow my lettuce, tomatoes, and cucumbers, I would easily save $300/month.
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The other side of the equation. As we reduce spending and control our budget, we also need to invest our money. Our money needs to make money.
If you are risk averse (cannot take a risk), then a high-yield savings account is right up your alley. At 3%, you are getting enough money to make a noticeable difference in your savings account.
The goal, therefore, is to save as much as possible in your HYSA. You can use this as an emergency fund and your investment account.
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The emotional side of money. As a self-proclaimed income investor, I love investing for high-yield dividends. I deeply understand risk tolerance, chances, probabilities, and the psychology of money.
My appetite for risk is high, but I understand that most people don’t feel the same. For most, investing in an HYSA meets their maximum risk tolerance.
But that’s okay. Knowing yourself is a massive part of the human experience. I would recommend you don’t limit yourself at face value.
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You may have a deep-seated negative connection with money. You can read books like “The Psychology of Money,” “Effortless Money,” and “Know Yourself, Know Your Money” to help you dive a little deeper into your mindset.
HYSAs for everyone. In the meantime, enroll yourself in an HYSA and start the saving process. Set a savings goal you want to achieve to keep yourself on track.
If you save $50,000 in an HYSA (at 3%), that is $125/month is passive income. That’s enough for a nice two-person monthly dinner without touching your principal amount.
Don’t forget; my favorite HYSA can pair with a checking account and a cashback debit card. This means you can spend your budget through the Discover debit, and they will deposit the cashback in your savings account.
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Over time, this leads to a whopping amount of interest payments without any risk and 100% access to your money (unlike certificates of deposits and savings bonds).
How to survive the recession. Every dollar you save needs to earn you money. Your goal isn’t to save money for spending later.
Your HYSA is an asset that produces money. The goal of any investment is to keep the asset and spend the money it pays.
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Therefore, the goal is to build the largest HYSA possible and use the interest to treat yourself. We call this delayed gratification.
If you are not an extreme budget person, now is a great time to become one. This recession will not take prisoners, so following interest rates will need to become common knowledge.
Conclusion. It’s tough to tell someone how bad a recession will affect them. We all believe we will “be good” during the darkest days.
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However, living through 2008 and 2020 should tell us that the unknown comes for all. The best way to protect ourselves and our futures is by preparing today.
By running a tight household budget and investing in an HYSA, we can safely prepare for the worst of 2023 and beyond.
No one knows the future, but you can determine your position by moving into the unknown. Do you want a $50,000 credit card with a $500 minimum payment?
Or, instead, have a $50,000 high-yield savings account that pays YOU $125/month? Who is in a better situation going into a recession? Good Luck!
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