Why Boosting Your Savings in 2021 Is More Important Than Ever
by Elizabeth Aldrich | Updated April 22, 2022 - First published on April 10, 2021
With a pandemic and an economic recession still looming above us, try to make sure you have enough emergency cash to last.
Several months into the COVID-19 pandemic, the National Bureau of Economic Research (NBER) announced that the U.S. economy was officially in a recession. We're still there, and while parts of the economy have begun to recover, many are lagging behind.
For example, unemployment has gone down drastically since it hit record highs in April 2020. That being said, the U.S. economy is still down 10 million jobs almost one year later. Recovery has been highly unequal as well, with some Americans coming out of it practically unscathed and others still feeling the monetary impact of the pandemic.
If you're struggling with job or income loss, you're not alone. This year might be best spent getting back on your feet, whether that means paying off debt or focusing on making ends meet. However, if you're lucky enough to be in a position to save money -- that is, you can pay the bills and don't have any high-interest debt -- 2021 is a good year to boost your savings even more than you normally would. Here's why.
Keeping extra cash in the bank during times of economic uncertainty
If you ask just about any financial expert what to do with your money during an economic recession, boosting your cash reserves is likely to be high on the list for several reasons.
For one, it's a good idea to beef up your emergency fund any time you're experiencing financial uncertainty. Whether that's an unstable job, an ongoing medical issue, or a recession, keeping additional money on hand in case an emergency expense pops up will keep you financially covered and help you avoid falling into debt.
Job and income loss are some of the biggest threats during a recession, especially when it's paired with a global pandemic. If you find yourself in this position, you don't want to end up having to drain retirement accounts or resort to credit cards and loans to cover your living expenses while you look for work. You want to maintain a healthy amount of liquidity so you can access extra money quickly if needed.
What's more, there's always a high risk of the stock market falling during a recession. If you don't keep enough cash reserves on hand, you could be forced to sell while the market is down in order to liquify some of your assets.
How much cash you should keep on hand
A typical, healthy emergency fund is about six months' worth of basic living expenses. That being said, some experts suggest you may need a larger emergency fund -- closer to nine months' or a year's worth in cash. This could be especially useful if your financial situation is unstable -- such as if you're a freelancer, your industry is suffering, or you're in the middle of a recession.
This rule of thumb needs to be adjusted to your own situation. If you're paying off debt, particularly high-interest credit card debt, it's wise to put additional money toward that debt right now even if it means a slimmer savings account. If you have investments you can liquify fairly easily if needed and you're pretty risk-tolerant, three to six months' living expenses might be fine for you.
How to boost your savings, even when money is tight
Increasing your savings is all about building a habit of stashing money away regularly, whether that's $25 or $250. The best way to do this is by automating your savings so you don't even have to think about it.
The best online savings accounts offer higher interest rates than what you'd get at a brick-and-mortar bank, and they come with features that let you automate your savings in a few clicks. You can have money transferred from your bank account into your savings once each week or month -- ideally right after you get paid so you don't get the chance to spend it first. Even if you set it up to transfer just $25 per week, you'll have $1,300 saved up in a year, and that's without interest.
To boost your savings even more, take advantage of any additional savings features offered by these accounts. Some of them will round up purchases and transfer the change to your savings, while others will analyze your spending habits and identify extra money that can be transferred to your savings once in a while.
Once you've done this, you can start identifying areas in your budget where you can cut back on spending to save even more. There are plenty of different budgeting methods to try. You'll even find some great budgeting apps that will do the heavy lifting for you. Once you've categorized your spending and noticed areas where you can cut back, commit to budgeting a certain amount per month and set up alerts on your budgeting or banking apps that will notify you when you're bumping up against that limit.
If you really commit to building a habit of saving more and spending less, you can make it happen. Socking away additional cash this year won't just help you out if you hit a roadblock -- it will give you better peace of mind at all times.
These savings accounts are FDIC insured and could earn you up to 12x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2022.
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.