Suze Orman now says you need a lot of emergency savings (and psst: you’re probably not going to like it)

Author and financial guru Suze Orman

Anna Webber/Getty Images

Financial experts have always urged people to set up an emergency savings fund, but the exact amount that should be in that fund has never been cut and dry. Recently, Suze Orman revised her advice on how much you need in an emergency fund to cover between 8 and 12 months, to 12 months of expenses. The reason? A potential recession looms on the horizon, she said. “You know that I hope you will strive to have enough reserve to cover 12 months of essential living expenses. And you also know that I realize that it may take time. Each month you get closer to your (new) goal is a month to celebrate your progress.You can see the best rates you can get on savings accounts here.

If this number gave you the feeling of “yikes”, you are probably not alone. A 2021 survey released by Bankrate found that more than half of Americans don’t have even three months of spending in an emergency fund. So, some pros say it’s okay to aim for less than 12 months of spending.

“If we could just get people to accumulate 3 months of net net income, we could save a lot of people from disaster,” says certified financial planner Craig Carnick of Transform Wealth, who adds that this 12-month goal can be especially difficult for those with large debts such as student loans.

And Alvin Carlos, Certified Financial Planner at District Capital Management, says 12 months is excessive for most people. “It may only be appropriate if you are looking to change careers and expect to be unemployed for a few months. Five to six months is usually enough as an emergency fund,” says Carlos.

You can see the best rates you can get on savings accounts here.

Of course, 12 months of after-tax net income is fine in an emergency reserve, but Carnick says what can be even more important is creating a plan to deal with the savings situation, along with an analysis. fast cash flow to prioritize what can reasonably be done.

Your age, marital status and career play a role in determining how much emergency savings you personally need. Certified Financial Planner Curtis Crossland of Suttle Crossland Wealth Advisors says if you’re retired or about to retire, you want to have between 12 and 18 months of living expenses set aside. “The goal with this amount is to buy time for markets to recover or economic conditions to improve and allow you to avoid having to touch investments,” says Crossland.

Married couples still in their careers want between 3 and 6 months of savings, but likely closer to 6 if the income is unbalanced, Crossland says. “You can get to a point where you have a lot more cash than is required in an emergency fund and that will weigh on your overall portfolio. Everyone has different circumstances and needs, so I normally don’t agree with 12 months coverage for everyone,” says Crossland.

You can see the best rates you can get on savings accounts here.

If you’re wondering where or how to start building an emergency fund, Orman says, “I recommend that you take the time to go through your bank and credit card statements for the past three months and re-estimate your basic monthly needs. living costs.” Carnick says going back three months can make sense because it means you should be able to cover expenses that aren’t billed monthly, like quarterly insurance payments. Plus, looking over a longer time frame will also catch expenses that are anything but regular, like car repairs, coinsurance, dental visits, and major purchases.In our practice, we actually ask clients to come back a year back,” says Carnick.

When calculating essential living expenses like mortgage, food, utilities, insurance, health care, and whatever else is necessary to keep you and your family in your current physical condition, it is Also important is to catalog your non-essential expenses like dining out, entertainment, clothing, and travel, but not so you can cut them. “The most effective way to build up cash reserves is to eliminate high-interest debt from credit cards or old college loans. Certainly eliminating unnecessary non-essential expenses like a new TV 65 inches would make sense,” says Carnick.

As for the time frame in which you need to be sure to have squandered significant savings, Orman predicts that a recession is likely and therefore precipitates an urgent need for emergency savings. “If you manage to increase your savings, don’t delay. The risk of us sliding into a recession in the coming months has increased with the Federal Reserve’s latest decision. »

You can see the best rates you can get on savings accounts here.

Crossland also says a recession is a legitimate concern. “Any time you encounter high inflation and economic growth metrics fall, you worry that you’re already in a recession and waiting for lagging data to confirm it,” Crossland says.

Of course, no one can guarantee whether or not we’re sliding into a recession, but, if we do, says Carnick, “individuals should do exactly the same thing as if a recession were nowhere in the horizon and the first step is to create a comprehensive financial plan.

Any advice, recommendations, or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our business partners.

Comments are closed.