Financial experts have always urged people to create an emergency savings fund, but exactly how much should be in that fund has never been cut and dry. Recently, Suze Orman revised her advice on how much you need in an emergency fund to cover between 8 and 12 months, to 12 months worth of expenses. The reason? There’s a potential recession looming on the horizon, she says. “You know that my hope is that you work your way toward having enough set aside to cover 12 months of essential living costs. And you also know that I realize that can take time. Every month you move closer to your (new) goal is a month to celebrate your progress.” You can see the best rates you may get on savings accounts here .
If that number gave you the feeling of “yikes” you’re probably not alone. A survey released in 2021 from Bankrate found that more than half of Americans don’t even have three months of expenses in an emergency fund. So some pros say it’s OK to aim lower than 12 months of expenses.
“If we could just get people to accumulate 3 months of net take-home income, we could save a lot of individuals from disaster,” says certified financial planner Craig Carnick of Transform Wealth, who adds that this 12-month goal may be particularly hard for those with large debts like student loans.
And Alvin Carlos, certified financial planner at District Capital Management, says 12 months is excessive for most people. “It may only be appropriate if you’re looking to switch careers and you expect to be unemployed for a few months. Five to six months is typically sufficient as an emergency fund,” says Carlos.
Of course, 12 months of net, after-tax income is nice in an emergency reserve, but Carnick says what may be even more important is creating a plan to deal with savings situation, as well as a quick cash flow analysis to prioritize what can reasonably be done.
Your age, marital status and career play a part in determining how much emergency savings you personally need to have tucked away. Certified financial planner Curtis Crossland of Suttle Crossland Wealth Advisors says if you’re retired or about to be, you want to have between 12 and 18 months of living expenses set aside. “The goal with that amount is to buy time for markets to recover, or economic conditions to improve and allow you to avoid having to touch investments,” says Crossland.
Married couples still in their careers want between 3 and 6 months of savings, but likely closer to 6 if the income is lopsided, says Crossland. “You can get to a point where you have far more cash than what’s required in an emergency fund and that will be a cash drag on your overall portfolio. Everyone has different circumstances and needs, so I don’t normally agree with a blanket 12 months for everyone,” says Crossland.
If you’re wondering where or how to start building an emergency fund, Orman says, “I recommend that you take the time to go through your bank and credit card statements for the past three months and work out a fresh estimate of your monthly essential living costs.” Carnick says going back three months can make sense, as it means you should be able to catch expenses that are not billed monthly like quarterly insurance payments. “Then too, looking over a longer period will also catch expenses that are anything but regular like auto repairs, insurance co-pays, dentist visits and large purchases. In our practice, we actually ask clients to go back one year,” says Carnick.
In calculating essential living costs like mortgage, food, utilities, insurance, healthcare and anything that is required to maintain you and your family in your present physical state, it’s also important to catalog your non-essential expenses like dining out, entertainment, clothing and travel, but not so that you can cut them out. “The most effective way to build cash reserves is to eliminate high interest debt from credit cards or old educational loans. Certainly, the elimination of unnecessary non-essential expenses like a new 65” TV would make sense,” says Carnick.
As for the timeline in which you should be sure to have significant savings squandered away, Orman predicts that a recession is likely and therefore precipitates an urgent need for emergency savings. “If you can manage to boost your savings, please don’t delay. The risk that we may be sliding into a recession in the coming months has risen along with the latest move by the Federal Reserve.”
Crossland also says that a recession is a legitimate concern. “Whenever you experience a high level of inflation and see economic growth measures fall, you worry that you’re already in a recession and just waiting for the lagging data to confirm it,” says Crossland.
Of course, nobody can guarantee whether or not we’re sliding into a recession, but, if we are, Carnick says, “individuals should do the very same thing as if a recession was nowhere on the horizon and the first step is to create a comprehensive financial plan.”
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