Emergency savings: How much cash to keep in uncertain times

As investors face economic uncertainty, financial gurus have recommendations for how much cash to stash aside. Despite strong second-quarter economic growth, nearly 60% of Americans believe the US is now in a recession, according to an Affirm survey of 2,000 individuals conducted in June.

The perception of a recession among the public often stems from personal financial experiences rather than macroeconomic indicators. Many Americans are feeling the pinch of rising costs in their daily lives, from groceries to housing, which contributes to their belief that the economy is struggling. This disconnect between official economic data and public sentiment highlights the complexity of economic realities and the importance of considering both statistical measures and lived experiences when assessing the state of the economy.

While Goldman Sachs and JP Morgan upgraded their recession estimates in August, some analysts still foresee an economic "soft landing," which means the Federal Reserve's actions will not produce a slump. Meanwhile, inflation continues to fall, but a weaker-than-expected July jobs report sparked stock market turbulence last week.

The stock market's reaction to economic data underscores the delicate balance investors are trying to strike. On one hand, falling inflation is generally positive for the economy and consumer purchasing power. On the other, a weaker jobs report could signal a slowdown in economic growth. This tension between different economic indicators creates a challenging environment for investors, who must navigate these conflicting signals to make informed decisions about their portfolios.

Despite the uncertainties, nearly 60% of Americans are uneasy about their amount of emergency funds, up from 48% in 2021, according to an annual Bankrate study of more than 1,000 U.S. adults conducted in May. According to Bankrate, over 27% of individuals polled have no emergency funds, the highest percentage since 2020.

This alarming statistic highlights a growing financial vulnerability among Americans. The lack of emergency savings can have far-reaching consequences, not only for individuals and families but also for the broader economy. Without a financial cushion, unexpected expenses or job loss can quickly lead to debt accumulation or financial distress. This situation underscores the critical need for financial education and policies that encourage and facilitate saving, even in challenging economic times.

Regardless of the economic climate, investors must emergency funds to pay costs in the event of a job loss or other unforeseen expenses. Financial gurus recommend the following amount of cash to set aside.

Dual earners: Three months is a rule of thumb

Certified financial planner Greg Giardino, vice president of Wealth Enhancement Group in Oakland, New Jersey, advises double-income families to save at least three months' worth of living expenditures.

However, you may modify that advice "depending on the reliability of those income sources," he noted. For example, commissioned staff with variable cash flow may require more than tenured professors. It's not easy to accumulate such large cash reserves. According to Bankrate's survey, only 44% of Americans have three months of expenses set aside for emergencies.

The challenge of building emergency savings is particularly acute for lower-income households, who often struggle to meet daily expenses, let alone set aside money for future uncertainties. This disparity in financial preparedness can exacerbate existing economic inequalities, as those without savings are more likely to resort to high-interest debt or face severe financial hardship during economic downturns. Addressing this savings gap requires a multifaceted approach, including efforts to boost wages, reduce living costs, and provide accessible financial tools and education to all segments of the population.

Single income: Save for six months or more

Experts recommend that single persons or families with a single income save at least six months' worth of costs.

However, bigger financial reserves may provide more flexibility in the event of a job loss or economic slump.

Douglas Boneparth, a CFP and the president of Bone Fide Wealth in New York, recommends six to nine months of savings for single earners.

"I've never met anyone who was upset because they had a little more money than they needed," said Boneparth, who is also a member of Financial Advisor Council.

Catherine Valega, founder of Green Bee Advisory, a Boston-based CFP and enrolled agent, stated that she is "more conservative than most other advisors" and advises single earners to invest 12 to 18 months of living costs in "safe, liquid investments".

Although the Federal Reserve may begin decreasing interest rates in September, investors still have "high-yield savings opportunities," she said.

Entrepreneurs: Maintain up to one year's spending

Entrepreneurs or small business owners with variable incomes may benefit from higher levels of savings – eight to 12 months of costs, according to Giardino of Wealth Enhancement Group. Of course, the actual amount for emergency savings is determined by your specific circumstances and family's needs.

The importance of tailoring emergency savings to individual circumstances cannot be overstated. Factors such as job security, health conditions, dependents, and long-term financial goals all play a role in determining the ideal emergency fund size. Moreover, the concept of emergency savings should be viewed as part of a broader financial planning strategy. While having liquid assets is crucial for immediate needs, balancing emergency savings with investments for long-term growth is essential for overall financial health. Financial advisors often recommend regularly reviewing and adjusting emergency funds as life circumstances and economic conditions change, ensuring that individuals maintain financial resilience without sacrificing opportunities for wealth building.