As investors navigate through the current economic uncertainty, the importance of having emergency savings set aside has become more apparent. Financial advisors recommend having a certain amount of cash reserves to cover expenses in case of unexpected events, such as a job loss or economic downturn. With recent surveys showing that a significant number of Americans are not comfortable with their level of emergency savings, it’s crucial to understand how much cash one should have saved up during these times of recession odds.
Current Economic Landscape
Despite the second-quarter economic growth, a survey conducted by Affirm revealed that nearly 60% of Americans believe that the U.S. is currently in a recession. This misconception has been fueled by raised recession forecasts from major financial institutions like Goldman Sachs and JP Morgan in August. However, some experts still anticipate an economic “soft landing,” where the Federal Reserve’s policies won’t lead to a downturn.
While inflation is on the decline, a weaker-than-expected jobs report for July has caused fluctuations in the stock market. The uncertainties surrounding the economy have left many individuals feeling insecure about their financial stability, leading to a greater need for emergency savings.
Importance of Emergency Savings
Regardless of the economic climate, having emergency savings is essential for individuals and families to weather unforeseen financial hardships. Experts recommend setting aside a certain amount of cash reserves based on different circumstances, such as dual earners, single income households, and entrepreneurs.
Dual Earners: Three Months Rule
For dual-income families, a rule of thumb is to save at least three months of living expenses. According to certified financial planner Greg Giardino, vice president of Wealth Enhancement Group in Oakland, New Jersey, this guideline can be adjusted based on the reliability of income sources. For example, individuals with unpredictable cash flow, such as commissioned workers, may need more than the standard three months’ worth of expenses saved up.
Building up three months of cash reserves can be challenging, as evidenced by the fact that only 44% of Americans have achieved this level of emergency savings. It’s crucial for dual earners to prioritize saving for unexpected events to ensure financial stability in the long run.
Single Income: Save Six Months or More
For single individuals or families reliant on a single income, experts recommend saving at least six months of expenses. This extended period of savings provides more flexibility in case of a job loss or economic downturn. Douglas Boneparth, a CFP and president of Bone Fide Wealth in New York, prefers saving six to nine months of living expenses for single earners.
In contrast, Boston-based CFP and enrolled agent Catherine Valega, founder of Green Bee Advisory, takes a more conservative approach and suggests saving 12 to 18 months of living expenses in safe, liquid investments. This level of savings can provide a buffer during challenging times and offer peace of mind knowing that there is a financial cushion in place.
Entrepreneurs: Up to One Year of Expenses
Entrepreneurs and small business owners with fluctuating incomes should aim to save eight to 12 months of expenses, according to Giardino of Wealth Enhancement Group. The unpredictability of self-employment warrants higher levels of emergency savings to cushion any financial setbacks that may arise.
The amount of emergency savings needed varies depending on individual circumstances and family needs. It’s essential to assess your financial situation and set realistic savings goals to ensure financial security during uncertain times.