How big should my emergency budget be?
- Personal finance experts urge the creation of an emergency fund ahead of a likely recession in 2023.
- The recommended emergency target of three to six months of spending is difficult to achieve.
- But cutting expenses and increasing income through different streams can get you there, experts say.
With economists sounding the alarm bells ahead of a likely recession in 2023, it’s time to start thinking about how your finances will be affected by shifts in the wider economy.
The key for secure your finances has an emergency fund. Five personal finance experts told Insider how to create one.
What is an emergency fund?
An emergency budget is a reserve of money available to use in case of difficulties. It’s different from money tied up in investments like an index fundharder to access, more volatile, subject to profit withdrawal fees, and generally considered longer term assets.
The idea of the emergency budget is to have low-risk savings that are quickly and easily accessible in times of crisis and, apart from the effects of inflation, are less exposed to the risk of severe devaluation when You need it.
With a very likely recession 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 between three and six months of expenses – a consensus supported by Well Fargo. This amount would cover the costs in case you lose your job unexpectedly and need to find a new one.
For most, this will likely be a tall order. Spending by the average US household totaled $66,928 in 2021, per the Bureau of Labor Statistics (BLS). This means that the typical contingency budget should be between $16,732 and $33,464 to cover the advised period.
But Ramit Sethi, founder of I will teach you how to be rich, indicates that this number is deceptively high because you tend to cut back on many unnecessary expenses, such as dining out and shopping for clothes, during a crisis. Instead, Ramit says, you should calculate a “keep the lights on” number.
“It’s like your phone goes into low power mode, it stops doing all these extra things. You want to experience the same for yourself,” Sethi said.
How can you go down there?
A recession may be coming, but it hasn’t happened yet. With an economy still in relative health and a labor market reduce unemployment again in Octoberthere are opportunities to significantly change your financial situation before a downturn occurs.
Andrea Worocha personal savings expert, told Insider that it’s important not to be intimidated by the multi-thousand dollar goal, but rather to work towards accumulating your first $1,000 in savings and go from there.
Download and start using a budgeting app
The first should be to download a budgeting app to understand where your money is going, Chen said. Mint or Rocket Money are a couple that help automate and reduce your expenses.
Chad Rixse at Leading 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 said, it comes down to the simple arithmetic of reducing spending and increasing savings.
Consider housing and vehicle costs
“Netflix is $12 a month or whatever. And that’s not your problem. Your problem is your $650 payment on your truck that’s sitting outside. Your problem is your $2,000 rent. And so the options are things like finding a roommate, or downgrading your car,” he said.
Many households own more than one vehicle, and selling one would significantly reduce operating costs. That’s what Chen and his wife did when they realized they only needed one car between them.
When it comes to your home, renting a spare or planning a downsizing now can help 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 cutting. Because they’re often automated, it can be easy to passively authorize unnecessary spending each month, Rixse said.
Budgeting apps, like Rocket Money, are a good place to start and help you track how much you’re using your subscriptions.
“A lot of people don’t know what they’re paying per month for this stuff because it gets lost in the mess of their day-to-day transactions,” Rixse said. “Just reviewing and reviewing your expenses and the things you aren’t using that you could cut out is a good way to quickly reduce your expenses.”
Refine your essential expenses
You can also save on essentials even if you can’t remove them entirely. The cost of food, which has jumped 11% over the past year, according to BLS dataare a good starting point.
Woroch said it’s important to make a meal plan before you go shopping to reduce waste and look for markdowns and specials.
Cameron Huddlestonauthor and director of Carefull, a financial security service for seniors, said bundling insurance and phone bills can cut costs.
Woroch said that by researching her home insurance, she was able to save $1,200. At a time when rising interest rates are making it harder to negotiate lower mortgage payments, this may be the best option for reducing the fixed costs of the home.
Find other sources of income
While reducing your expenses is more easily under your control, you can also take steps to increase your income in the months ahead. The quickest and easiest way is to find an extra job.
“There’s a limit to what you can cut, but there’s no limit to what you can earn,” Sethi said. “So increasing your income is one of the most powerful things you can do to design and live your wealthy life.”
It’s easier and easier to be independent if you have experience writingsocial media or graphic design skillsor you know sell through tutoring. You can easily advertise your time on sites such as Upworksaid the experts.
If you can’t think of a skill to monetize, childcare and walk the dog are some of the most obvious examples of low-skilled secondary agitation, experts said. Alternatively, working at the bar or on hold, Schneider and Woroch said, can help build a cash reserve quickly.
If all else fails, selling unwanted items is another option. Chen says he uses OfferUp all the time, while Huddleston says she uses Facebook Marketplace regularly.