According to consultants, this is how much money you need for a recession


designer491 | iStock | Getty Images

With the recession looming, more and more financial pundits are swapping ideas about how to prepare — including how much money it might be wise to put aside.

Ending June was a tumultuous six months for the S&P 500 Index, which has fallen more than 20% since January, limiting its worst six-month start to a year since 1970.

The future may be unclear, but stock market volatility, rising inflation, geopolitical tensions and supply chain bottlenecks have eroded Americans’ confidence in the economy.

More from Personal Finance:
5 steps you should be taking now to prepare your finances for a recession
Experts see a recession coming. How to prepare a portfolio
S&P had its worst half in 50 years. But this investment strategy is not dead

According to a June Bankrate poll, more than half of Americans are now concerned about their emergency savings, up from 44% in 2020.

Many are worried about falling short: nearly a third of Americans have less than three months of spending in savings, and nearly a quarter don’t have an emergency fund, Bankrate found.

Although rock-bottom yields have made cash less attractive in recent years, that could change as interest rates rise. And experts say savings have value in peace of mind.

This is how much money you need to save at different points in your career, according to financial advisors.

Double-income families: save at least 3 months

The typical recommendation for dual-income families is three to six months’ worth of living expenses in savings, said Christopher Lyman, a certified financial planner at Allied Financial Advisors in Newtown, Pennsylvania. The rationale: Even if a earner loses their job, there are other sources of income that help the family keep up with spending.

Single earner: Set aside 6 months or more

However, single-earner households could benefit from increasing savings on six to nine months’ worth of expenses, Lyman said.

Some advisers say it’s better for both single-earner and dual-income households to have higher cash reserves to offer “more options” and extra flexibility in the event of a layoff. Recessions tend to be accompanied by higher unemployment, and finding a new job may not be as quick.

Catherine Valega, CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts, suggests holding expenses in cash for 12 to 24 months.

Personal finance expert and best-selling author Suze Orman has also recommended additional saving, recently telling CNBC she’s pushing for 8 to 12 months of spending. “If you lose your job, if you want to quit your job, that gives you the freedom to continue paying your bills while you figure out what you want to do with your life,” she said.

Entrepreneurs: Plan 1 year of expenses

As economic uncertainty mounts, Lyman advises entrepreneurs and small business owners to set aside a year’s worth of business expenses.

“Following this advice has saved some of our business owner customers from being closed due to the pandemic,” he said.

Some people are uncomfortable with having so much money “on the side” and not earning anything, especially now that stocks seem to offer a great buying opportunity.

Christopher Lyman

Certified Financial Planner with Allied Financial Advisors, LLC

Retirees: reserve 1-3 years of expenses in cash

With rising inflation and relatively low interest rates on savings accounts, large amounts of cash can be difficult for some retirees to sell. Experts, however, suggest keeping expenses for one to three years.

“Having an adequate cash buffer is a critical element of having your money in retirement,” said Brett Koeppel, a CFP and founder of Eudaimonia Wealth in Buffalo, New York.

Having enough cash on hand can limit the need to sell assets when the market falls, a misstep that could eat up your retirement savings faster.

Of course, the exact amount of cash you have available in retirement will depend on monthly expenses and other sources of income.

For example, if your monthly expenses are $5,000 per month, you receive $3,000 from a pension and $1,000 from Social Security, you may need less cash, around $12,000 to $36,000.

“It allows you to hold your longer-term investments without taking the risk if the stock market goes down,” Koeppel said.

Saving is a “very emotional topic”

There is some flex in the “right” amount. Money is a “very emotional subject,” Lyman admits, noting that some clients deviate from his savings recommendations.

“Some people are uncomfortable with having so much money ‘on the side’ and not making anything, especially now that stocks seem to offer a great buying opportunity,” he said.

Others were previously “cautious” and now feel “thoroughly concerned about the market,” motivating them to save significantly more, Lyman said.


Comments are closed.