What Happens to Your Money in the Bank During a Recession?

Even though we don’t have control over the economic downturn, it makes us anxious and worried about our finances and future. This uncertainty also forces us to learn about the economy and ways to keep our money safe during a recession.

In this article, we will cover everything you need to know about the recession and whether your money is safe in your bank accounts or not.

Stay till the end of the article, and we will show you the best recession-proof method to keep your money safe and how to use it to generate cash flow.

Let’s get started!

Table of Contents

    What Happens In a Recession?

    To fully understand what and why happens to our money in bank accounts during a recession, we must know the basics of a recession.

    The recession is usually defined as six consecutive months of negative economic growth. Typical reasons for this are decreased consumer spending, interest rate hikes, increased taxes, and much more.

    When the overall economy slows down, it impacts all of us, but businesses are targeted first. Usually, they see decreased sales, access to capital, and profit margins. It then leads to layoffs, reduced working hours, and, unfortunately, business closures.

    And after that, everyone can feel the effects of a recession.

    What Happens to Your Money in the Bank During a Recession?

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    Effects of a Recession

    A recession can have wide-ranging effects that differ in how they affect various economic sectors. Here are a few consequences of a recession:

    • Job losses. Businesses struggle to make profits, which leads to layoffs and job losses. One of the most significant signs that we’re in a recession is a rise in the unemployment rate.
    • Decreased consumer spending. When everyone is afraid of losing jobs, consumers tend to reduce their expenses and overall spending.
    • Reduced investments. Everyone becomes more cautious with their money, which we can see in decreasing investments for businesses and individuals.
    • The downturn in asset prices. All the effects we already mentioned cause a decline in asset prices like housing and stock prices.

    Now that you know the basics, we will answer the question everyone wants to know.

    Is Money Safe in the Bank During a Recession?

    Let’s get straight to the point—yes, generally speaking, your money is safe in the bank account during a recession. But, as you probably assumed, we have one big BUT we need to explain.

    How Do Banks Keep Money Safe During a Recession?

    Your money will be secured in a bank account during a recession, but only if the bank is FDIC-insured. And if you bank with a credit union, your money is secured if the credit union is insured by the National Credit Union Administration (NCUA).

    Still, that’s not all.

    Banks are generally safe and stable places for money storage, but there are numerous examples where these institutions failed, with the collapse of Silicon Valley Bank as the last one. Banks fail when they can’t meet their obligations to the people who have deposited money with them or to those they’ve borrowed from.

    When the bank fails, a client’s money is protected only if the bank is federally insured and backed by the Federal Deposit Insurance Corporation (FDIC).

    In other words, if the bank where you keep your money fails but is FDIC insured, you will still be able to take your money. Usually, the money is transferred to another bank with FDIC insurance, or you’ll receive a check.

    And, unfortunately, we have another “but.”

    FDIC Deposit Insurance Limit

    FDIC insurance covers only up to $250,000 per account owner or ownership category at each insured bank. In other words, with a single account owner, individual and joint accounts at insured institutions may receive $250,000 in insurance.

    And if you have bank accounts in credit unions covered by NCUA, it also offers deposit insurance up to $250,000.

    FDIC Deposit Insurance Limit

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    The FDIC coverage also applies to businesses up to $250,000 per entity, per bank, just like it does to individual bank accounts. While the account balance is within the permitted range, FDIC insurance covers both the principal and accrued interest.

    However, this only refers to savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs), while other financial products are not covered.

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    What’s most important here is that if you have more than $250,000, you are at true risk of losing money in the event of a bank failure, which is more likely to happen during a recession.

    Financial Products Not Covered by FDIC Insurance

    If you have one of the following financial products, then, unfortunately, FDIC insurance doesn’t offer coverage:

    • Stock investments;
    • Bond investments;
    • Mutual funds;
    • Life insurance policies;
    • Annuities;
    • Municipal securities;
    • Safe deposit boxes or their contents;
    • U.S. Treasury bills, bonds, or notes;
    • Cryptocurrencies, tokens, and other digital currency assets.

    People usually get confused about money market mutual funds because money market deposit accounts are insured by the FDIC, but mutual funds are not. 

    Why is that? 

    Well, the difference between these accounts is in their respective risk levels.

    While losing your initial investment in a money market mutual fund is theoretically possible, it is highly unlikely. On the other hand, money market deposit accounts pay interest without putting your money at risk.

    Another doubt people frequently have about financial products not covered by the FDIC is about individual retirement accounts (IRAs). And it’s not without reason.

    You can invest in IRA savings accounts in several different ways, and some are insured by the FDIC while others are not. If a specific type of account has FDIC insurance when it holds regular funds, it also has insurance when holding IRA funds. For instance, IRA funds deposited in regular savings or money market accounts are insured, while IRA savings invested in mutual funds or stocks are not.

    So, Is Your Money Secured?

    Yes, but also no.

    The final answer will depend on your specific situation—how much money you have, what type of financial products you have, and whether your financial products are in an FDIC-insured bank or not.

    Let’s break this down a little more.

    1) If you have one of the following—savings accounts, checking accounts, money market accounts, or certificates of deposit (CDs) in an FDIC-insured bank or credit union insured by NCUA and have less than $250,000, your money is secured in the bank even during a recession or bank failures.

    Pro tip: If you’re unsure if your bank has federal deposit insurance, look for “Member FDIC” language on its website or in its marketing materials. Or you can even check the bank’s logo, because many banks put small icons on their logos to show they are covered.

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    2) But if you have more than $250,000 in the FDIC-insured bank account, other types of products (see the entire list above), or a savings account, checking account, money market account, or CD in the bank that is not insured, then your money isn’t that safe.

    Of course, it doesn’t mean you will certainly lose money, but you are at a greater risk.

    4 Tips for Recession-Proofing Your Finances

    If your situation is like that in our second scenario, here you will find out what you can do to secure your money. Or even if you’re in the first group of people who are safer in case of banking failures, you can still find valuable advice.

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    #4 Don’t Overextend Yourself

    Keep to your budget and live within your means to minimize any potential financial harm during a recession, especially if you are in a group of people at higher risk.

    #3 Try to Pay Off Debt

    Advice to prioritize paying off high-interest debt isn’t new or revolutionary, but it really works. If you pay down high-interest debt, you will ultimately save more and reduce the total interest you will pay in the long run.

    So, if you pay off your debts:

    • You will have more credit available in case of an emergency or tricky situation;
    • You will avoid paying higher interest rates;
    • You probably won’t need other sources of credit.

    #2 Establish an Emergency Fund

    You probably already have an emergency fund, but it’s good to highlight the importance of it once again. Most financial professionals suggest having at least three to six months’ worth of living expenses in your funds, just in case, but once you know how to save money, you can never forget this skill. 

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    #1 Create Your Personal Banking System—Lifestyle Banking

    The ultimate way to secure your personal finances is to create a personal banking system and stop depending on your financial institution.

    We have used Lifestyle Banking for years now, and it has helped us pay off $120,000 in debt, cover different living expenses like family vacations and car repairs, and, most importantly—generate cash flow.

    When you’re your own source of finances, you don’t care too much about the economic downturn because you don’t depend on third parties.

    Are you intrigued?

    We’re sure you are. Here is how it works.

    Lifestyle Banking is a financial strategy built around a well-designed whole life insurance policy. It allows individuals to use their life insurance policies to generate cash flow and pay for all of their expenses, while building more cash value at the same time.

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    In this system, the individual purchases a whole life insurance policy and then uses the cash value that accumulates over time as collateral for a loan. The loan can be used for any purpose, such as purchasing a home, paying for a vacation, or funding a business venture.

    The loan is paid back over time with interest, but the interest is paid back to you, not to a bank or other institution. Lifestyle Banking is designed to support individuals and their lifestyles, not make banks richer.

    Your personal bank still works similarly to a traditional bank—you borrow money against your cash value and pay interest. But you’re the one who recaptures it, not the banks.

    And another huge difference—with Lifestyle Banking, you don’t risk losing money during a recession or inflation, and you have enough money to finance your own lifestyle.

    Interested in learning more?