- Personal finance experts urge to build an emergency fund before a possible recession in 2023.
- The suggested emergency target, of three to six months’ worth of expenses, is difficult to achieve.
- But cutting spending and increasing income through different streams can get you there, experts said.
With economists sounding the alarm ahead of a possible recession in 2023, it’s time to start thinking about how your finances will be affected by movements in the wider economy.
Key to bulletproofing your finances already have an emergency fund. Five personal finance experts explain to Insider how to build one.
What is an emergency fund?
Emergency fund is a cash reserve ready to be used in times of trouble. This is different from money tied up in investments like an index fundwhich is harder to access, more volatile, subject to withdrawal costs on profits, and generally considered as long-term assets.
The idea of an emergency fund is to have some low-risk savings which is quick and easy to access in times of crisis, aside from the effects of inflation, which is less at risk of severe devaluation at the point that needs them.
With a recession very likely in 2023, according to Bloomberg economistsit is even more important to have a backup.
How big is my emergency fund?
The experts interviewed by Insider agreed that the emergency fund should cover costs between three and six months – the consensus supported by Well Fargo. This amount will cover expenses if you unexpectedly lose your job and have to find a new one.
For most, that’s likely to be a tall order. The average American household costs a total of $66,928 in 2021, per Bureau of Labor Statistics (BLS). That means an emergency fund should generally be between $16,732 and $33,464 to cover the recommended amount of time.
But Ramit Sethi, the founder I Will Teach You To Be Rich, said the number is misleading, because they tend to cut out a lot of unnecessary spending, like eating out and shopping for clothes, during the crisis. Instead, Ramit says, you should calculate a “keep the lights on” number.
“It’s like when your phone goes into low power mode, it stops doing all these extra things. You want to find the same thing for you,” said Sethi.
How can you get there?
A recession is coming – but it hasn’t happened yet. With the economy still in relative health, and the labor market cut unemployment again in OctoberThere is an opportunity to materially change your financial position before a downturn strikes.
Andrea Worochpersonal savings expert, told Insider that it is important not to be intimidated by the multi-thousand dollar target, but instead work to build up your first $1,000 in savings and go from there.
Download – and start using – a budget app
The first must download the budgeting application understand where your money is going, Chen said. Mint or Rocket Money are partners that help automate and trim your output.
Chad Rixse in Forefront Wealth Partners said: “If it is easy and intuitive for you, then there is a much higher chance that you will stick with it and use it regularly. Consistency is the key here.”
From there, experts say, it comes down to simple arithmetic to cut spending and increase savings.
Consider home and vehicle costs
“Netflix is 12 bucks a month or something. And that’s not your problem. Your problem is your $650 payment on your truck sitting outside. Put your car down,” he said.
Many households have more than one vehicle, and selling one will cut running costs drastically. That’s what Chen and his wife did when they realized they only needed one car between them.
As for your home, renting out a spare room or making plans to downsize now can help you feel more comfortable during a downturn, he said.
Don’t forget the little things
Small expenses, like streaming subscriptions, are often the easiest place to start cutting back. Because they’re often automatic, it can be easy to allow unnecessary spending each month, Rixse says.
A budgeting app, like Rocket Money, is a great place to start, and helps you keep track of how much your subscription is being used.
“A lot of people don’t know what they’re paying per month for things like that because it gets lost in the shuffle of their daily transactions,” Rixse said. “Just going through and reviewing your expenses and what things you don’t use and can cut is a great way to quickly reduce your expenses.”
Perfect your essential spending
You can also save on essential items even if you can’t cut them all. Food costs, which jumped 11% in the past year, per BLS datais a good place to start.
Woroch says it’s important to create a meal plan before you go grocery shopping to reduce waste, and look for markdowns and specials.
Cameron Huddlestonwriter and director of Carefull, a security service for the elderly’s finances, said bundling insurance and phone bills together can cut costs.
Woroch said to me shop around for her home insurance, he can save $1,200. Once Upon a time rising interest rates makes it harder to negotiate lower mortgage payments, this may be the best option to cut costs home fixed.
Find other income streams
While cutting out your exit is easier in your control, you can also take steps to increase your income in the coming months. The fastest and easiest way is by looking for extra work.
“There is a limit to how much you can cut, but there is no limit to how much you can earn,” said Sethi. “So increasing your income is one of the most powerful things you can do to design and live a rich life.”
It’s getting easier to freelance if you have experience copywritingsocial media or graphic design skillsor your knowledge selling through tutoring. You can easily Advertise your time on sites like Upworksaid the experts.
If you can’t think of a skill to monetize, babysitting and walking the dog are some of the most obvious examples of the lower-skill side, experts say. Otherwise, the bar or waiting to work, Schneider and Woroch say, can help quickly build a cash buffer.
If all else fails, selling unwanted items is another option. Chen said he uses OfferUp all the time, while Huddleston said he regularly uses Facebook Marketplace.