Here’s How Much Money You Should Have in Your Emergency Fund in 2023
Given the state of inflation , labor market uncertainty, and the looming specter of a recession , many of us are currently focusing on our day-to-day finances, allowing our savings goals to take a backseat for a while. However, a tough economy is exactly the time when building up your savings should be a priority, in particular increasing your reserve fund.
I spoke with WalletHub analyst Jill Gonzalez about why an emergency fund is so important in uncertain times, and how and why your savings goals should be different this year. Here’s what you need to know about saving for the bad times when it looks like they might be around the corner.
Why the reserve fund is more important now than ever
First, a summary of what exactly an “emergency fund” is, as opposed to other savings vehicles: your emergency fund is a cash reserve set aside for unplanned expenses or financial hardship, such as a job loss, a medical emergency, or a sudden urgent car or house. repair.
Gonzalez explains that it’s important to set up an emergency fund “so you don’t get caught off guard by some kind of financial shock. “It will have a long-term impact on your budget.” And since there are plenty of worrying economic indicators that a recession is around the corner, increasing the chances of layoffs or cutbacks in income, you need to make sure you save all you can before the money becomes too scarce to do so. .
How much money to send to your emergency fund in 2023
As we’ve previously advised , a typical rule of thumb is to aim for six months of living expenses in your emergency fund. When you calculate this number, consider expenses such as housing, food, utilities, insurance, transportation, and debt payments. Non-essential expenses such as vacations, entertainment or dining do not count towards your “emergency” bill.
However, the ideal amount of savings in your reserve fund should change depending on the state of the economy. So when you’re living in inflation-ridden hell, Gonzalez says you really should try to save even more than the usual six months. “If possible, you should try to hide nine months of income in an emergency fund,” Gonzalez says. “This may seem like overkill, but it’s easy to underestimate how much money you’ll need in the event of an emergency.”
If spending even six months is too unrealistic for your current financial situation, another benchmark for what is considered a “starter” reserve fund is about one month of rent plus your insurance deductible. Here’s what else to consider if the idea of an emergency fund seems intimidating right now:
How to start saving when the economy is bad
Putting aside savings may not seem like a priority in hard times. Gonzalez points out that even if you find it harder to save money during this time of record high inflation, it’s not impossible to build an emergency fund. Start by forwarding some of your expenses. If you haven’t already, make a list of everything you spend money on and consider what non-essential expenses could go into your emergency fund instead.
Thankfully, “cutting” your spending may not be as draconian as it sounds. (In other words, you can probably still buy your morning coffee occasionally .) To get started, check out our tips on how to stop spending money unconsciously .