As inflation pressures continue to weigh on the U.S. economy, your emergency fund just got promoted to “stat” status.
Financial experts have always advocated for the need to have a rainy-day fund. So, it’s not a matter of if you should have a financial emergency, but when. For millions of struggling Americans, that when is now.
What Will Happen In 2023?
According to the most recent CPI report released by the BLS, consumer prices rose 0.4 percent last month and were up 8.2 percent from a year ago.
Source: U.S. Bureau of Labor Statistics
While this rate is slightly lower than in June when it peaked at 9.1 percent, it’s still hovering close to the highest levels in 4 decades.
Increases in the medical care, food, and shelter indexes were the biggest contributors to this monthly adjusted increase.
The growing consensus among economic experts is that the American economy will enter a recession in 2023. Stock market declines, historically high inflation, and drastic rate hikes are warning signs that the U.S. economy is teetering on a cliff’s edge.
How to Financially Prepare For 2023
As with any economic downturn, the wealthy may complain, yet they can still weather increasing prices without breaking a sweat.
Many other Americans will experience financial discomfort and adopt cost-cutting measures, such as canceling vacation plans, cutting streaming services, or eating out less.
And then there are lower-class Americans who are already struggling. They will see their precarious situations worsen.
As inflation continues to soar, Americans must rethink how they handle their emergency savings, regardless of their economic class.
Reasons Why You Need an Emergency Fund
If you don’t have an emergency fund, you’re in good company. 40 percent of Americans don’t have enough cash to cover at least 3 months of expenses if they lost their primary job.
This is dangerous as an emergency fund will cushion you in case of:
- Job loss
- Car maintenance and repairs
- Unforeseen medical expenses
- Urgent pet care
- Unexpected home repairs
- Family emergencies
Knowing that you have enough funds to cover yourself in a crisis can help you feel more at ease.
Here’s what to Do When You Have:
- No Savings
You have probably heard the standard advice that you should have 3-6 months’ worth of daily expenses saved up in an accessible account.
Ideally, you’d set aside 6 months if you have a single-income household and 3 months if you have a dual-income household. The idea is that with a dual-income household, there are slim chances of both of you losing your jobs.
To hit this target, start by summing up your monthly expenses, including:
- Utility bills
- Medical expenses
- Rent or mortgage payment
- Car/student loan payment
If your bare bones monthly expenses total $1,500, having an emergency fund for 3-6 months would mean saving $4,500-$9,000.
The problem is that this can feel almost impossible for some people. If that’s the case with you, you can start with a $1,000 goal. A modest emergency fund in a financial downturn is better than nothing.
- Some Savings
Maybe you were able to save 3 months’ worth of living costs or even hit the 6 months benchmark, but increasing prices have driven you to dip into your emergency fund.
If you haven’t already, assess your financial situation before all the savings are gone. Take a keen look at your current income, monthly expenses, and savings contributions to get a clear view of your overall finances. Next, fine-tune where you can and do what makes sense for right now.
One easy way to reach your initial target is first to increase your income. Finding the money may require taking on a second job or more cost-cutting.
Next, automate your savings. You can have your bank divert some of your direct deposited paychecks into a dedicated emergency savings account. Doing this will help you lessen the temptation to spend that money.
- Strong Savings
Maybe you have a well-funded rainy-day fund.
You might have boosted your savings during COVID because you could not spend. Or maybe you significantly reduced your expenses because you could work from the comfort of your home and may still be teleworking.
If you fall into this category, you may be able to afford to juice up your savings with ease.
During a financial downturn, fortunes can change pretty quickly.
If you’re highly paid, you might need an emergency fund with 12-18 months of living expenses. Finding a similar paying position might take that long if you’re furloughed or laid off.
When meteorologists predict extreme weather, it’s unlikely that you’ll sit by idly and hope it isn’t as bad as they say. The same should apply to the current news of a looming recession.
Without proper preparation, an economic downturn can irrevocably hurt your financial stability. That’s why now a good time to beef up your emergency fund is.
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