A Recession May Be Coming. Should You Boost Your Emergency Fund by $1,000 to Prepare?

It may be a good time to grow your cash reserves.

Is a recession going to strike in 2023? Some financial experts still think so. And if economic conditions sour, there's the potential for unemployment levels to rise in a meaningful way. 

That's a scary thought when you don't have all that much money in your savings account. And a recent Federal Reserve report found that 32% of Americans are not in a position to cover a $400 emergency expense. Meanwhile, if you're laid off, and you're not given any sort of severance pay, your earnings might take more than a $400 hit, even if you're immediately eligible for unemployment benefits. So you may want to think about boosting your emergency fund -- even if you have well more than $400 in the bank right now.

Do you have enough emergency savings to get through a recession?

Most people are advised to have anywhere from three to 12 months' worth of living expenses tucked away in a savings account. That's a wide range, but the reason three months is the minimum threshold is that it might take you that long to find a new job if you lose yours. And during a recession, it might take you a lot longer than three months to get hired again.

Now, you may be thinking, "If I get laid off, I'll just fall back on unemployment benefits." But those benefits may not even replace half of your paycheck, depending on where you live and what your state's maximum weekly benefit looks like. 

Also, it can take time to process an unemployment claim. And if you're self-employed, here's some bad news -- you won't be eligible for unemployment benefits. (At the start of the COVID-19 pandemic, a temporary provision was put into place that allowed freelancers and self-employed workers to collect unemployment. But that provision expired quite some time ago.) So in that case, it's especially important to have a solid level of cash reserves. If you don't build up your emergency fund, you might end up having to resort to charging your basic bills on a credit card and paying it off in time, all the while accruing a large amount of interest. 

Which end of the emergency savings spectrum is right for you?

When you're told to save anywhere from three months to 12 months of living expenses, it can be hard to know which end of the spectrum to favor. So you'll need to ask yourself these questions:

• Am I entitled to unemployment benefits? If not, saving more could pay off.
• Am I the sole earner in my household? If you have a partner who also works and you're in completely different industries, you may not necessarily need 12 months' worth of living expenses in the bank. Chances are, you won't both lose your jobs at the very same time (though it's technically possible). 
• Do I have dependents? If you have kids, pets, or other family members who rely on you financially, you may want to push toward added savings.
• How flexible are my bills? If you're locked into a mortgage loan and car payment, you might need more emergency savings than someone with no car and a month-to-month lease they could always break with 30 days' notice if money gets tight.

All told, you don't necessarily need to lose sleep over an impending recession. But it does pay to make sure you're prepared for one financially. And that could mean pumping more cash into your emergency fund in the coming weeks and months.