- Personal finance experts are urging building an emergency fund ahead of a likely 2023 recession.
- The recommended emergency target of three to six months’ spending is almost impossible to achieve.
- But cutting expenses and boosting revenue through diverse streams can get you there, experts say.
With economists warning of a likely recession in 2023, it’s time to think about how movements in the broader economy are affecting your finances.
The key to Bulletproof your finances has an emergency fund. Five personal finance experts told insiders how to build one.
What is an emergency fund?
An emergency fund is a reserve of cash that can be used in difficult times. It’s different than money tied up in investments an index fundwhich are more difficult to access, more volatile, are subject to withdrawal costs for gains and are generally viewed as longer-term assets.
The idea of the emergency fund is to have some low-risk savings which are quickly and easily available in times of crisis and, barring inflationary effects where you need them, are less likely to be severely devalued.
With a recession very likely in 2023, according to Bloomberg economistsit is even more important to have reserves.
How big should my emergency fund be?
Experts polled by Insider agreed that an emergency fund should cover three to six months’ expenses — a consensus powered by Well Fargo. This amount covers the costs in the event that you unexpectedly lose your job and have to look for a new one.
This is probably a big challenge for most. The average American household spent $66,928 per year in 2021 the Federal Office for Labor Statistics (BLS). That means the typical emergency fund should be between $16,732 and $33,464 to cover the recommended period.
But Ramit Sethi, founder of I will teach you to be rich, says this number is misleadingly high as you tend to have a lot of unnecessary expenses like eating out and shopping for clothes during a crisis. Instead, says Ramit, you should calculate a “keep the lights on” number.
“It’s like your phone goes into sleep mode, it stops doing all these extra things. They want to find out the same thing for themselves,” Sethi said.
How to get there?
A recession could be coming – but it hasn’t happened yet. With the economy still in relative health and the job market Unemployment cut again in OctoberThere are ways to make significant changes to your financial position before a downturn hits.
Andrea Woerocha personal savings expert told Insider that it’s important not to be intimidated by the multi-thousand-dollar goal, but instead work on building your first $1,000 in savings and moving on from there.
Download a budgeting app – and start using it
The first should be Download a budgeting app understand where your money is going, Chen said. Mint or Rocket Money is a pair that will help you automate and cut back on your spending.
Chad Rixse at Forefront Wealth Partners said, “If it’s easy and intuitive for you, then you’re much more likely to stick with it and use it regularly. Consistency is key here.”
From there, experts say, it boils down to the simple arithmetic of cutting spending and increasing savings.
Consider home and vehicle costs
“Netflix is $12 a month or whatever. And that’s not your problem. Your problem is your $650 payment for your truck that’s outside. Your problem is your $2,000 rent downgrade on your car,” he said.
Many households have more than one vehicle and selling one would drastically reduce running costs. That’s what Chen and his wife did when they realized they just needed a car together.
As for your home, renting out a spare room or planning a downsizing can make you feel more comfortable when a downturn hits, they said.
Don’t forget the little things
Small expenses, like streaming subscriptions, can often be the easiest places to start saving. Because they’re often automated, it can be easy to passively allow unnecessary spending each month, Rixse said.
The budgeting apps like Rocket Money are a good place to start and will help you track how much you are using your subscriptions.
“A lot of people don’t know what they’re paying per month for things like this because it gets lost in the clutter of their day-to-day transactions,” Rixse said. “Just going through and reviewing your spending and figuring out what things you can’t use and cut out is a great way to quickly reduce your spending.”
Optimize your essential expenses
You can also save on important things, even if you can’t do without them entirely. Grocery costs up 11% over the past year per BLS dataare a good start.
Woroch said it’s important to create a meal plan before grocery shopping to avoid waste and to keep an eye out for discounts and special offers.
Cameron Huddlestonan author and director of Carefull, a security service for older people’s finances, said bundling insurance and phone bills can reduce costs.
Woroch said over when shopping for home insurance, she was able to save $1,200. At a time rising interest rates As mortgage repayments become more difficult to negotiate, this may be the best option for reducing fixed home expenses.
Find other sources of income
While you’re more likely to cut back on your spending, you can also take steps to increase your income in the coming months. The fastest and easiest way is to look for a part-time job.
“There’s a limit to how much you can save, but there’s no limit to how much you can make,” Sethi said. “So increasing your income is one of the most powerful things you can do to create and live your rich life.”
It’s always easier to freelance when you have experience advertising textssocial media or Graphic Design Skillsor do you know sell through tutoring. You can easily Promote your time on sites like Upwork‘ said the experts.
If you can’t think of an ability to make money, babysitting and dog walk are some of the most obvious examples of lower-skill side hustles, the experts said. Otherwise, according to Schneider and Woroch, bar or waiter work can help to quickly build up a cash buffer.
If all else fails, selling unwanted items is another option. Chen says he uses OfferUp all the time, while Huddleston said she regularly uses Facebook Marketplace.