Recessions are like rainstorms: you may not know exactly when they’ll happen, but you know they’re inevitable. With many experts having expressed concerns about a potential recession in 2023, it has put financial preparedness on everyone’s mind. But while the dark clouds haven’t broken into a storm yet, it’s wise to have an umbrella handy.
The Ever-Present Risk of Recessions
Despite a steady economy, the specter of recession remains. Economic downturns are an inherent part of the financial world. They come and go, and their presence reminds us to be cautious and prepared. One significant concern during a recession is job loss. With bills still arriving but no paycheck to cover them, savings become crucial.
How Many Months of Living Expenses Do You Need?
The answer varies based on job stability and individual circumstances. However, if we look at history as a guide, since 1950, recessions have lasted about 10 months on average. But do you need savings for the entire duration? As of September 2023, the average unemployment spell was around 9.2 weeks. So, while you may face longer unemployment periods during a recession, chances are, you’d find a job before the 10 months.
- High-Risk Industries: If you’re in sectors vulnerable during downturns, like retail or hospitality, saving up to 10 months of living expenses is prudent.
- Standard Recommendation: For many, a cushion of three to six months’ worth of expenses should suffice to weather the storm.
Dual-Income Vs. Single Earner Households
Christopher Lyman, a certified financial planner, provides distinct advice for different types of households:
- Dual-Income Families: Save three to six months of living expenses. If one person loses their job, the other’s income can help tide things over.
- Single Earners: Boost your savings to six to nine months. With only one stream of income, a bit more caution is necessary.
- Entrepreneurs: Business owners, given their unique risks, should aim for a full year of business expenses. In times of economic uncertainty, this cushion can be a lifesaver.
- Retirees: With different financial dynamics, retirees should keep one to three years of expenses readily accessible. This strategy prevents the need to sell assets during market lows, safeguarding retirement balances.
Some experts, like Catherine Valega, advise even more substantial savings, suggesting 12 to 24 months of expenses in cash. Personal finance guru Suze Orman also leans towards a more significant buffer, recommending 8-12 months of expenses.
Finding the Right Balance in Saving
It’s essential to strike a balance. While saving for potential recessions is wise, going overboard might mean missed opportunities elsewhere. Your money could be languishing in a low-interest bank account when it could be earning more elsewhere.
Don’t treat recession savings as an end-all. Instead, view it like any other emergency fund. A three to six-month buffer should help most people navigate rough patches without financial scars.
While the future remains unpredictable, our preparedness for it doesn’t have to be. Analyze your financial situation, understand the risks, and save accordingly. After all, it’s always better to be safe than sorry.