Here’s How Much Cash You Need Stashed If a Recession Happens
Here’s How Much Cash You Need Stashed If a Recession Happens
Nicole Spector Tue, April 2, 2024
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. They all said 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.
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“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.”
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, financial analyst, 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, attorney and 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 of 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.
This article originally appeared on GOBankingRates.com: Here’s How Much Cash You Need Stashed If a Recession Happens
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