A financial planner has 3 pieces of advice for anyone who's trying to save more, even during a recession

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  • Savings rates tend to go up during a recession, and that's certainly true of the economic downturn we're experiencing now.
  • If you're looking to save even more during this period — a good idea in the face of future uncertainty — start by saving in three buckets: emergency fund, short-term savings, and long-term savings.
  • Then, automate your savings as much as possible. And don't worry about keeping your money out the market — now is a good time to have cash in liquid accounts.
  • Check out Vanguard Personal Advisor Services® to get the investment advice you need to help build the life you want »

With the dramatic economic swings we've experienced this year thanks to the coronavirus pandemic, it's no surprise that the US has entered into another recession. Between furloughs, unemployment, a volatile stock market, and a decrease of demand in many industries, Americans are understandably holding on to more cash in savings these days. 

Historically speaking, people tend to save more during recessions, and the Federal Reserve Bank of St. Louis is seeing this trend play out again over these past few months. The reported personal savings rate has averaged out around 7% over the past five years and up until February 2020, when it rose to 8.3%. By April, it had spiked to a record 33.7% and though it has been declining since, it's still in the high teens as of July. 

Saving during a recession

Given everything that is going on, what should we be doing right now in terms of savings? Daniel Patterson, a financial planner and owner of Sweetgrass Financial Planning in Mount Pleasant, South Carolina, has been guiding numerous clients' savings strategies throughout the pandemic. He says that saving money is always important, even if you have to slow down how much you save for a little while. 

"If you're putting your [savings] contributions on hold because you've lost your job or have been furloughed or your business can't open, then that's perfectly understandable and I would encourage you not to beat yourself up about that," Patterson says. "Just make sure that you get back at it once you get back on your feet."

Here is a look at some of the savings advice Patterson is giving his clients, which could also help you build a healthy stash yourself.    

1. Be deliberate in how you save

Patterson advocates for building a savings of three "distinct 'buckets' of money: your emergency fund, short-term savings, and long-term savings."

Start with an emergency savings account that is large enough to cover between three and six months' worth of essential living expenses, such as housing, insurance, fuel, etc. This money should be easily accessible in cash, preferably in an interest-bearing savings account, and be a first priority when you're saving money. 

"A sobering study was done a couple of years ago by the Federal Reserve that found that nearly 40% of American households would struggle to be able to pay an unforeseen expense of $400," Patterson says. "A great way to prevent your family from becoming part of that statistic is to be very intentional in always keeping your expenses lower than your income and saving the difference."

The second target is saving for a short-term goal, such as a wedding or a down payment on a home. These goals should be achievable within one to three years. Beyond that, a more long-term strategy might fit better. Patterson recommends putting these kinds of funds into an online savings account or certificate of deposit, where they can earn interest and you can easily liquidate the money if and when needed. 

The third target is to save for long-term goals, such as retirement or paying for a child's education. This is where investing savings may be a smarter choice over keeping your money liquid in a savings account.    

"Since we have some time before we need this money, it makes sense to invest in something that might be a little more volatile in the short-term, but historically has had a substantially better rate of return over the long term," Patterson says. "For most individual investors, I would highly recommend investing in broad-based mutual funds or ETFs (exchange-traded funds) rather than individual stocks."

2. Choose automation when possible

Patterson says that automating deposits into savings products is always a good idea, since you're making contributions without even thinking about it. It forces you to "pay yourself first" and therefore not spend money that could be placed in savings. Look for a checking account that can set up a schedule of deposits that can be automatically routed into a savings account.   

"I recommend scheduling payments as the same day as when you get paid, so before any other money is spent, you're paying yourself first," Patterson says. "Contributing to your company's 401(k) or 403(b) plan is another form of automated savings. Your contributions are withdrawn before you receive your paycheck, which helps to ensure that you will actually save that money and not spend it on other things."

3. Keep more cash on hand for the time being

Due to the economic downturn, Patterson is advising clients to keep a little more cash in their emergency savings than they normally might. This provides more of a cushion should they find themselves unexpectedly furloughed or unemployed. 

He says that his firm is also holding back on how they invest lump sums of money on behalf of their clients. Because of the volatility in the market that the pandemic has caused, they're investing only a third of a client's money once a month for three months. 

"While the markets have recovered nicely and hopefully the worst is behind us, I wouldn't be entirely surprised if the market has some more choppy moments before the pandemic runs its course," Patterson says. "Because of this, we will probably continue to drip new lump sums of money into the market versus investing the full sum up front until the pandemic has run its course."

Anyone can save

Patterson says that building savings is within everyone's grasp, even if it takes time and careful money management. He advocates making and sticking to a budget that includes putting some money in savings with every paycheck or period of time that works for your type of income. 

Paying close attention to what you're spending your money on and what you can cut back on is a good first step in establishing a savings plan. 

"Obviously there are some people right now that have lost their jobs due to COVID and are just trying to stay afloat and pay all their bills," Patterson explains. "But I think there's also a significant portion of the US population that doesn't have a firm grasp on what they're actually spending their money on … You might be surprised by how much money you just spend on 'stuff' that you don't need and can do without and begin directing that money towards your savings instead."

If money is tight at the moment, you can come up with a plan to increase how much you save over time. One example is increasing the percent you add to your 401(k) by one point every year until you reach your maximum contribution level. When you get a raise, instead of taking the additional pay with each check, you can allocate a percentage of that amount to your savings or 401(k).  

"In my time as an advisor, I've worked with a couple of public-school teachers with modest salaries who, through frugal living and disciplined saving/investing practices, had become multimillionaires," Patterson says. "I've also worked with a single 20-something making upwards of $300,000 right out of college who couldn't figure out how she was going to pay for her electric bill because her spending was so out of control."

He adds, "Regardless of income, if you're spending more than you're making, then it's probably not going to end well. If, on the other hand, you can keep your expenses in check and become a disciplined saver, you'll be surprised where you can end up, even with a modest salary."

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