You know there's a question that I've been asked a lot lately and that is should we be looking at saving any differently during a recession?
My answer is, I think that a recession is a great signal that we should be focusing on the basics, because oftentimes when things are good, we seek out risk.
You've probably had friends tell you about the great new stocks that they're jumping into or, we all have those friends who tell us about the cryptocurrency that they've bought. You heard a lot of that when things are going really well in other parts of the economy, but as things start to tighten up and the economy starts to slow down it can sometimes lead to a recession.
A recession means that there's going to be less stability in job markets, tighter credit markets, and that means that you might not be able to fall back on things like credit cards or personal loans. We saw, for example, during the pandemic when things are really tight economically, that credit limits were cut or accounts were closed, taking away the safety net for I'm sure hundreds if not thousands of people.
This is why it's more important than ever to make sure you build your own financial safety net and for me, a financial safety net would mean a strong emergency fund.
Your next question might be, how much should I have saved to cover an emergency in the event that I lose my job or lose some portion of my income?
In a recession there's no one simple answer. Everyone’s finances are going to be unique, but there's three groups that I want to focus on here and this will kind of give you an idea of where you should put your focus and what your goals should be for an emergency fund.
Group number one is going to be two income families.
These are households that have two individuals bringing in a full-time income and for this group it is recommended to have at least six months of your expenses saved. These are your mandatory expenses, the things that you're going to have to pay for regardless of what's going on. That would be your rent, or mortgage, car payments, Insurance, food, and gas. All the things you're still going to have to pay for in any circumstance.
If you're in that two-income household group, you want to aim for at least six months, because you do have another income to rely on. The chances are not high that both of you will lose your jobs or significant portions of your income at the same time.
If you know that you're in an industry that is subject to a lot of turnover or maybe volatility when things start to slow down, you may want to consider following the rule set for this next group.
The next group is the single income household.
These are obviously individuals who just have one income coming in, whether you're by yourself or your family, and you're the sole Breadwinner. If you're in that bucket, you want to save somewhere between 6 to 12 months of your expenses. The reason is that you don't have anyone else to rely on if things go bad.
If you do have some type of loss of income it all depends on you, so you want to build up an even stronger safety net to cover you while you're maybe looking for ways to replace that income or whether just a difficult time in the economy.
The last group I want to focus on here are those who are self-employed.
This group of individuals have even more of a financial burden that they have to carry and so for that reason you need to save even more money. So, in addition to having one year of your personal expenses saved you also want to have one year of your business expenses saved.
Because at a time when things are slowing down or you're seeing some type of interruption in your income, the last thing you want to do is have to cut back on the way you operate your business. It's not enough funds coming in to cover your day-to-day operations, so that's why it's important to not only focus on what you need to run your household, but also what you need to keep your business going, that way you can bring in more income.
Whatever group you find yourself in, just make sure that you're saving this emergency fund in a savings account or CD. You don't want this money to be subject to any additional risk, you want it to be there waiting for you when you need it the most.