Should I Buy Fixed-Income Assets If I'm Afraid of a Recession?

Dear Kristin,

Interest rates on fixed-income investments like CDs and bonds are pretty good right now. But you have to tie away your money for a few years to get the most out of these vehicles. I'm nervous to tie up money in a 5-year CD when it could be kept in a savings account instead. And with a pending recession, I might need that money sooner rather than later in case I lose my job, or something else happens. So, should I take the risk and put money into a CD with a good interest rate now? Or should I just keep it in my savings in case there's a recession?

Sincerely,

Fixed-Income Fan

Dear Fixed-Income,

This is such a great question, because with the risk of a recession looming, a lot of people are bolstering their savings. But therein lies the problem. At a time when inflation is making so many fixed-income investments more attractive, do you want to tie up your funds when you might need them to be “liquid” in case you lose your job? 

The answer is, do both.

It would be unwise to ignore the high rates of interest that you can get from purchasing Savings I Bonds, for example, or a certificate of deposit (CD), just so that you can keep it in a savings account and have it available for you in case of a scenario that might not actually happen. 

So here’s what I’d recommend. Make sure your emergency funds are kept in a savings account that you can access at all times. It’s typically recommended that you have three to six months set aside, but with a risk of a recession, you might feel more comfortable with six months in your bank account. Once you’ve done that, anything else can be placed in fixed-income investments, like bonds or CDs, or regular assets like stocks, which would give you access to your money even sooner.                              

Fixed-income assets are also great to protect your funds from the eroding impact of inflation by giving you a return that rises along with inflation. Right now, the return on a Savings I Bond is 6.89%—better than what you could get in the markets, which are down more than 10% so far this year.                                 

And don’t forget, if you open up a high-yield savings account, your savings will collect more than the paltry 0.24% interest you’d get if you kept it in a regular account at your bank. In a high-yield account, your savings will accrue interest up to nearly 4%.                    

Spreading out your savings into different accounts and vehicles will ensure that you’re maximizing your returns, while also keeping you protected in case any emergencies arise (which I hope they never will). Also, don’t forget that once you feel good about savings, turn to investing as a way to build wealth. If you do, you’ll feel so much more at ease about your financial situation, no matter what happens. 

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.