Here’s How Much Cash You Need Stashed If a Recession Happens
For months economists have been predicting that a recession will strike. And Americans are paying attention. According to Finder’s Consumer Confidence Index, which gathered information in January and February 2023, 76% of respondents say it’s likely the U.S. will enter a recession in the next 12 months. And right now, the average American is saving $692 a month.
Is that enough money? How much cash do you need stashed away if a recession happens?
Finance Experts All Say the Same Thing
GOBankingRates consulted quite a few finance experts and asked them this question and they all said basically the same thing: You need three to six months’ worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one’s income tier and cost of living.
“For two-income families, you could be closer to the 3-month side,” said Ted Braun, CFP, SVP financial advisor at Wealth Enhancement Group. “For a single-income family, I would be a little closer to the 6-month side. What this does is prevent the need to dip into 401(k)s or brokerage accounts if someone unexpectedly loses their job.”
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Doing the Math
Here’s how to quickly calculate exactly what a six-month cash cushion should be.
“To calculate your number, you need to add up your monthly essential expenses (what does it cost for you to live/exist), add in a small buffer, and then multiply that total number by 6,” said Michela Allocca, a financial analyst and entrepreneur and the founder of Break Your Budget. “For most people, this is $20k in cash +/- $5k.”
Businesses and Entrepreneurs Should Set Aside More
If you’re in charge of a business and want to keep it afloat during a recession that threatens it, you’ll need to set aside more cash.
“I advise entrepreneurs and small business owners to strive to set away one year’s worth of business expenses since there is more economic uncertainty,” said Sarah Sharp, an attorney and the partner and founder of SK&S Law Group. “Several of our client business owners who followed this advice avoided having to close their doors due to the pandemic.”
Investments Matter Too
When prepping for — or riding out — a recession, a cash reserve isn’t the only thing you’ll need. You’ll also need a sound investment strategy.
“When it comes to investing, the key is diversification,” said Scott D. Nelson, founder Thrive Wealth Strategies. “Make sure to spread your investments across different asset classes such as stocks, bonds, real estate and commodities.”
Nelson adds to be sure to look into low-risk options like certificates of deposit or bond funds, which offer higher yields than traditional savings accounts but with less fluctuation in returns.
“A typical recession would be combated by lowering interest rates, but this one involves a rising interest rate environment,” Nelson said. “This opens up a lot of opportunities to make some money on your conservative investments.”
Don’t Structure Your Finances Around Fears of a Recession
Though you should always be prepared for an economic downturn, you shouldn’t necessarily overhaul the way you lead your financial life to accommodate the prospect of calamity.
“A proper financial plan should be designed to weather both good times and bad,” said R.J. Weiss, CFP, founder of The Ways to Wealth. “Therefore, your strategy shouldn’t change based on a potential recession. Long-term, the goal is to worry less about what the economy is doing and have a balanced plan that doesn’t need adjusting based on economic factors.”
Err on the Conservative Side
“That said, if you worry about your finances during both good and bad times, adopting a more conservative approach might be beneficial,” Weiss said. “This could involve increasing the size of your emergency fund or adjusting your asset allocation.”
But one must also consider the opportunity cost of such adjustments.
“A more conservative asset allocation will likely mean a later target retirement date,” Weiss said. “Having more money in cash, in the form of an emergency fund, might mean foregoing other shorter-term financial goals, such as replacing a car or taking a trip.”
Rich People Will Have A Whole ‘Nother Experience
If you happen to be wealthy and naturally have more than enough cash (along with investments) no matter the state of the economy, your experience of a recession will be quite different. Rather than having to err on the conservative side, you may use a hairy economic time to get aggressive.
“The rich approach a recession as a buying opportunity,” said John A. Kilpatrick, Ph.D., MAI, the managing director of Greenfield Advisors. “Savvy investors — and even the middle class with some flexibility in their investments — will move money from long-term assets (bonds, stocks) into cash if and when they sense a recession coming on. When a recession does hit, great assets can be bought at fire-sale prices (real estate, blue-chip stocks, even artworks) and the rich get even richer coming out of a recession.”
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