Americans are eating their way through the excess savings they built up during the COVID-19 pandemic — with the majority now worse off than they were in early 2020, according to a Federal Reserve study of household finances.

The study, as reported by Bloomberg, shows that 80% of U.S. households saw their cash savings drop below pre-pandemic levels between March 2020 and June 2023.

Don’t miss

• Millions of Americans are in massive debt in the face of rising rates. Here's how to get your head above water ASAP

• Worried you haven’t saved enough for retirement? Here’s how to get your savings on track

• Big box stores are getting away with overcharging their customers — use this app to instantly get the best deals when you're shopping online

The poorest 40% of households suffered an 8% drop in cash savings and the middle 40% (the U.S. middle class) also saw their bank deposits and other liquid assets topple. Only the wealthiest 20% of households are still enjoying the extra cash they stockpiled during the pandemic, with their savings about 8% above where they were in March 2020.

With many Americans now running low on cash in a time of inflation and sky-high interest rates, some financial analysts believe the U.S. economy could run out of steam, with a possible recession in the cards.

If you’re feeling cash strapped, here are three ways to firm up your finances before an economic downturn.

Emergency savings

Having a stash of emergency cash is more important than ever when your finances are feeling the sting of an economic downturn.

If you’re suddenly slapped with a big medical bill or your car breaks down, that back-up fund — which you should not never use for regular expenses — will stop you from falling into financial distress.

The amount of money you should save in an emergency fund varies depending on the individual. Financial experts suggest you should have $1,000 cash on hand at all times, and if possible, you should also stash away around three to six months of living expenses in case you suffer a long-term disruption like being laid off from your job.

Wherever you are on your emergency savings journey, you may consider stashing some cash in a high-yield savings account (HYSA). With an HYSA, you could earn more interest on your money and benefit from greater compound growth than you would with a traditional savings or checking account.

You may also want to consider using other high-yield savings products like money market deposit accounts (MMDA) or a certificate of deposit (CD) to make the most of the current high interest rates. But remember that banks and credit unions will often charge an early withdrawal penalty for taking money out of a CD before its maturity date.

Read more: Thanks to Jeff Bezos, you can now use $100 to cash in on prime real estate — without the headache of being a landlord. Here's how

Reduce your debt as much as you can

Paying down your debt when you’re low on cash may seem like a huge mountain to climb, but your bank account will thank you in the end.

This is especially important in the current high interest rate environment. If you rack up too much high-interest debt on your credit card or other personal loans, you could fall behind on your payments, be subject to financial penalties and your balance can quickly spiral out of control, making it even harder to get debt free.

There are several methods you can use to pay down your debts. Some focus on paying off the smallest balance first, while others encourage focusing on the debt with the highest interest rate attached to it first.

Whatever method you choose, you’ll need to stick to a budget that breaks down your monthly income into necessities, wants, savings and debt repayments. You may need to revisit that budget on a regular basis, depending on how your cash reserves are looking.

Delay major purchases (if you can)

A steady stream of interest rate hikes in the U.S. have made it a lot more expensive to borrow money for major purchases like a house or a car.

The average APR for new and used vehicles in September was 7.4% and 11.4%, respectively, according to data from Edmunds. But if you have a bad credit score, you could be charged rates of up to 14.8% for a new car and 21% for used cars, according to Carsdirect.com.

Bloomberg reported recently that Americans are falling behind on their car payments at the highest rate in nearly three decades — with the percent of subprime auto borrowers at least 60 days past due on their loans rising to 6.11% in September, beating a previous high of 5.95% in January. That’s no surprise, given the cost of borrowing today.

Similar struggles are being felt in the housing market. Mortgage rates have hit their highest level since 2000, with the average 30-year fixed mortgage rate dipping slightly to 7.76% last week, from the prior week’s average of 7.79%. At the same time, house prices continue to rise, primarily due to low inventory.

Low on cash reserves and up against it from an interest rate standpoint, you may want to consider delaying any major purchases like a car or a house until the economic turbulence has died down a little.

Remember, if you’re desperate to invest in real estate, there are ways to do that without dropping a huge pile of cash on buying a home. You can invest in real estate investment trusts (REITs), which will pay you regular dividends that you can save or reinvest, or you could buy fractional shares of real estate through a crowdfunding platform. There are many options available, even for those with just a small amount of money to invest.

What to read next

• Owning real estate for passive income is one of the biggest myths in investing — but here's how you can actually make it work

• Kevin O'Leary reveals how 'money destroys families' and shares 3 paths to financial freedom without depending on relatives

• 2 ways gold can help secure your future in an uncertain economy to prepare for your golden years

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.