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How recession fears are impacting savings behaviour

While a recession hasn’t officially been declared, Canadians’ spidey senses are tingling. Whether it’s soaring inflation, rising interest rates or the steady drumbeat of recession-mongering news stories, people are starting to prepare for the storm.

What are people doing to batten down the hatches? And should you be starting to stockpile some savings as well? Let’s take a look.

Canadians are stockpiling savings for a possible recession 

Rumors of an impending recession have been swirling for well over a year, and Canadians have changed their behaviours in anticipation of an economic downturn – as well as in response to rising inflation and higher interest rates. Over a third of Canadians are building up their savings, but it’s not as simple as saving or not.

A majority believes a recession is imminent or happening

Canada has yet to meet the technical definition of a recession, but people are feeling the pinch nonetheless. The study found that 36% of us believe a recession is already happening, while 27% believe it will come before the year is out. That makes almost two-thirds of Canadians who are noticing a downturn in their household or community.

Inflation is likely a driving influencer of this opinion. Even if the economy is flat, or even still growing, wages aren’t rising anywhere near as quickly as prices. The cost of essentials like food and fuel are at all-time highs, and rising interest rates are making it harder for people to afford housing.

Fear of a recession is playing havoc with retirement savings

As more Canadians struggle to afford the essentials, they’re changing the way they approach saving for retirement. But the research shows there’s little consensus over what to do when it comes to long-term savings.

On one hand, 12% of survey participants said they are taking advantage of higher savings rates and actually putting away more for retirement than they had been previously. We don’t know enough about this group to know where the money is coming from, but they may represent a minority of people who could stand to benefit from inflation.

Also read: How to make the most of rising GIC rates

On the other hand, 15% said they’ve reduced the amount they’re contributing to their RRSPs and a further 8% have actually dipped into their retirement savings to make ends meet. It would appear the former group has decided that retirement can wait if it means keeping their budget balanced today, while the latter is already falling behind in their ability to afford the essentials.

More people are saving for a rainy day

The study also found that 19% of Canadians are saving more in an emergency fund. At least some of the money being saved could be diverted from retirement savings. There are tax consequences for withdrawing money from an RRSP, and some people may be making a conscious decision to use another savings vehicle, like a tax-free savings account (TFSA) they can withdraw from without penalty.

Are we in a recession now?

Canada hasn’t met the technical definition of a recession yet, but there’s no denying that it feels like the economy is on the downswing. People appear to be cutting back on spending, work hours and tips are drying up, and the headlines continue to remind us that we’re on the precipice. The technical definition of a recession is two consecutive quarters of contraction in the Gross Domestic Product measure – upcoming data reports should confirm whether or not a recession is upon us in the coming weeks

What do experts say about a recession in 2023? 

For the most part, the experts don’t have a crystal ball

All the statistical modeling and think-tanking in the world can’t predict human behaviour, which is what the economy really comes down to.

These well-meaning experts have been sounding alarm bells about a recession for roughly the last 16 months, but one has yet to materialize. Economists thought in June 2022 that a recession might happen later that year. By September, a recession was expected to appear any day. In January 2023, we were warned the unfolding recession would be deeper than expected but would likely be over by summer but that prediction was walked back in March. Early this summer we were told the recession was once again postponed, and was possibly off the table. And this week, we’re being told the recession may already be here – we just haven’t felt it yet.

Compare this with the Great Recession of 2008-09. In October, 2007, an RBC forecast called for growth in 2008 while a Wall Street Journal headline read “No Recession in Sight.” In February, 2008, NPR reported that the U.S. Federal Reserve Chairman did not believe a recession would materialize. And even well into the spring of that year, the experts were forecasting continued growth.

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Is stockpiling savings the right approach? 

Saving money is always a good decision if you can afford it. Living within your means leaves wiggle room for when things get tough, and having money saved makes it easier to afford the expensive surprises life throws at you. This is true regardless of whether you think a recession is coming or not, but the threat of a downturn is by no means a bad source of motivation.

What to do with your savings ahead of a possible recession

Whether you have savings already, or want to get into the habit, there are a few things you might want to do to prepare for a recession should one occur.

1. Pay down debt

Paying down debt can benefit you two ways during a recession.

First, reducing the amount of interest you have to pay is a great way to reduce your expenses. Every $100 in credit card debt you carry can cost you as much as $25 per year. 

Second, reducing your balance owing on credit cards and lines of credit frees you up to borrow money later on if you need it. Just keep in mind that lenders can decide to reduce your credit limits or call in your lines of credit if you lose your job or there's a significant economic downturn, so try to balance paying off debt with saving if you can. 

2. Start or build up your emergency fund 

An emergency fund doesn’t have to be anything major. Even stashing $10 a week will build up to $520 over the course of a year – enough to pay for an unexpected car repair, a smashed phone screen or a nice date you couldn’t otherwise afford.

3. Open a high-interest savings account

Interest rates are going up, and that means you can earn even more by investing your money in a high-interest savings account. The best high-interest savings accounts in Canada are currently paying everyday interest rates as high as 3.0% and have no monthly fees, so you can grow your emergency fund even faster.

4. Consider GICs for even higher returns

Guaranteed Investment Certificates lock your savings in for a set period of time, but pay even more interest than savings accounts. If you can commit your money to a GIC for a one-year term, you can get a guaranteed interest rate as high as 5.75% - a return of $57.50 for every $1,000 you save.

5. Don’t forget your tax-free savings account

Your tax-free savings account (TFSA) is a great way to save money while avoiding the taxes charged on investment income. With a TFSA, you’re free to contribute within your limits and withdraw as much as you want whenever you want. If you have a significant amount of cash to save or invest, this could be the way to go.

The bottom line

With recession rumors in the air, now might be the time to taketime take a second look and beef up your financial game plan. With a plan in place and the right tools to grow your savings, you’ll be better prepared for whatever the economy throws your way.

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