Emergencies may be unpredictable and unavoidable, but it doesn’t mean you can’t prepare for them.
Even during times of economic downturn, there are many steps you can take to improve your financial situation. Aside from avoiding more debt, building up your cash reserves is one of the best ways to recession-proof your life.
Knowing how much to have in an emergency fund and other ways to secure your money during an economic slowdown improves your chances of weathering the financial slump.
What Is an Emergency Fund?
An emergency fund is money you set aside for true emergencies, such as sudden income loss, urgent house repairs, or necessary medical expenses. During times of financial distress, you’ll have a safety net with that extra money stashed away.
If you don’t have an emergency fund, a recession is actually the ideal time to build one. With the economic decline, sending money to your savings should be a priority.
But recession or not, creating an emergency fund should be part of your financial goals. Every dollar you save is one more you can use during unexpected circumstances.
How to Create an Emergency Fund
One way to get started on your emergency fund is to set aside a portion of your salary each month. To make it more convenient, consider setting up automatic transfers to fund your account.
Another way to save for your fund is to divert your stimulus check or tax refund. This may be the better option if saving regularly seems unrealistic.
You probably want to store your cash in a bank or savings account that earns interest and can be quickly liquidated should the need arise.
By now, you may be wondering how much to have in an emergency fund. The truth is that it depends on your situation and what will give you peace of mind. Factors such as your income, debts, lifestyle, monthly costs, and dependents make the size of your fund an entirely personal decision.
However, many financial advisors suggest putting away enough to cover at least three to six months’ worth of expenses. This is often sufficient to help you weather unforeseen expenses.
On the other hand, other experts recommend a more substantial cushion, meaning having six to twelve months’ worth of expenses. This is to better account for the effects of a recession.
The bottom line is that when thinking about how much to have in an emergency fund, choose a comfortable savings level that could address basic expenses for a few months.
List of Ways to Be Frugal
While having a hefty emergency fund can certainly improve financial stability, practicing intentional spending is just as essential. Here’s how you can save money whether or not the recession has impacted your finances.
- Adjust your budget after figuring out how much to have in your emergency fund, then discover more opportunities to save.
- Cut down on unnecessary spending like online shopping, dining out, and large purchases.
- Live within your means or don’t use more than 30 percent of your net income on lifestyle or luxury expenses.
- Avoid taking on extra, unnecessary debt.
Remember that building your savings during economic uncertainty can go a long way in protecting your finances and alleviating anxiety.
Money Management Tips During a Recession
For a sturdier financial footing during the economic decline, consider these simple steps you can take.
Keep Your Money Safe
Where should savings be during a recession? When storing your money, make sure to keep it safe and liquid—somewhere you can access easily without penalties or taxes. You may opt for a high-yield savings account or money market account, but don’t disregard low savings rates since you’ll still earn free money.
Consider Additional Income Streams
When you diversify your income, you can lessen the impact of a sudden job loss since you’re not reliant on one source. Perhaps you can drive for a ridesharing company or turn your hobby into a side gig. Use your extra income to pad your emergency fund or pay down debts.
Focus on Long-Term Financial Goals
A recession won’t last forever, so don’t lose sight of your financial goals if you want to maintain financial security. While you may be more focused on surviving now, you’ll still need savings for what comes next.
Contact Lift Credit Today
Want to learn more about how much to have in an emergency fund? Or how to get through a tough financial spot? We can help! Reach out to us today at [email protected] or 800-223-5858.