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Due to the threat of recession, more and more financial experts share how to prepare — including how much money it would be wise to set aside.
The future may be unclear, but stock market volatility, soaring inflation, geopolitical conflict and supply chain shortages have eroded Americans’ confidence in the economy.
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Indeed, more than half of Americans are now concerned about their level of emergency savingscompared to 44% in 2020, according to a June Bankrate survey.
Many are concerned about insufficient spending: Nearly one-third of Americans have less than three months’ worth of savings, and nearly one-quarter have no emergency fund, Bankrate found.
While sharply lower returns over the past few years have made the money less attractive, it could be changes as interest rates rise. Experts say the peace of mind that comes with saving matters.
Here’s how much cash savings you’ll need at different points in your career, according to financial advisors.
A typical recommendation for dual-income families is to save three to six months of living expenses, said Christopher Lyman, a certified financial planner with Allied Financial Advisors in Newtown, Pennsylvania. Rationale: Even if one of the earners loses their job, there are other sources of income to help the family keep up with expenses.
Single-parent households, however, can benefit from increased savings for six to nine months of expenses, Lyman said.
Some advisers say that for both single earners and dual-income families, it’s better to have more cash on hand to provide “more options” and more flexibility in the event of a layoff. Recessions usually go hand in hand with higher unemployment rateand finding a new job may not happen soon.
Kathryn Vallega, CFP and wealth advisor at Green Bee Advisory in Winchester, Mass., suggests keeping 12 to 24 months of expenses in cash.
Personal finance expert and best-selling author Suze Orman also recommends additional savings and recently told CNBC that she needs 8-12 months worth of expenses. “If you lose your job, if you want to leave your job, it gives you the freedom to keep paying the bills while you figure out what you want to do with your life,” she said.
With more economic uncertainty, Lyman recommends that entrepreneurs and small business owners try to set aside one year for business expenses.
“Following this advice has saved quite a few of our business owner clients from closing due to the pandemic,” he said.
With inflation skyrocketing and interest rates relatively low on savings accounts, some retirees find it difficult to sell large amounts of cash. However, experts suggest keeping expenses for one to three years.
“Having an adequate cash reserve is critical to keeping your money safe in retirement,” said Brett Koppel, CFP and founder of Eudaimonia Wealth in Buffalo, New York.
Having enough cash can limit the need to sell assets when the market falls, it’s a misstep that could drain your retirement balance faster.
Of course, the exact amount of money you should have in retirement depends on your monthly expenses and other sources of income.
For example, if your monthly expenses are $5,000 a month, you’re getting $3,000 from your pension and $1,000 from Social Security, you may need less cash, about $12,000 to $36,000.
“This allows you to keep your long-term investment risk-free sell when the stock market falls“- said Keppel.
There is some flexibility in the “right” amount. Money is “a very emotional subject,” Lyman admits, noting that some clients balk at his savings advice.
“Some people don’t like having so much money ‘on the side’ and not earning anything, especially now that stocks seem like a great buying opportunity,” he said.
Others were “cautious” before, but now feel “a careful anxiety about the market,” motivating them to save much more, Lyman said.