The 1 Thing You Don't Want to Be Caught Without in a Recession

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KEY POINTS

  • Recessions and unexpected costs can arise at any time.
  • Everyone should have cash on hand to sustain them through these emergencies.


Even if you have one, you probably ought to give it a closer look right now.

Recessions are a natural part of the economic cycle, but that doesn't make them any easier to live with. They're times of serious financial stress for a lot of people, but you may be able to mitigate some of that stress by having a plan in place.

There are several steps you can take to better weather a recession, including reevaluating your budget and advancing your professional skills to make yourself more valuable to your employer. But if you only make one move to improve your recession readiness, try this.

You can't predict the future

While we can be fairly certain that we will experience another recession at some point, we don't know when or how bad it will be. Similarly, we can't guess when we'll experience financial crises in our own lives. But that doesn't mean we should just wing it and hope we'll be able to scrape together enough cash when we need it.

You'll have a much easier time in a recession if you have an emergency fund to help you pay for these unplanned expenses. This is extra cash you keep on hand in a savings account so you can access it whenever you need it. That way, you won't have to take on debt if you lose your job or end up with unexpected bills.

How much you keep in your emergency fund depends largely on your lifestyle. You should have at least three months of living expenses, but some people feel more comfortable saving six or 12 months of expenses. If you're worried about a recession leading to prolonged job loss, you probably want more money saved up.

You're also free to decide which expenses to count when calculating the size of your emergency fund. If you only care about saving for the basic essentials, you might want to leave streaming services out of your emergency fund budget, for example. But if you hope to continue using these services, even in the event of a job loss, you should probably include them in your budget.

Make sure that your emergency fund is enough to cover your health insurance deductible as well, unless you're saving for that in a health savings account (HSA). Many insurance plans today have large deductibles, and it might be difficult to pay for it all if your emergency fund is too small.

You can't just set it and forget it

Once you know approximately how much you want in your emergency fund, you can set up savings goals for yourself. Think about when you'd like to have your emergency fund ready by and how much you need to set aside per pay period in order to make that happen.

Try to stick to this goal as best as you can and avoid touching your emergency fund until you actually need it. Remember, it's for unforeseen events only. If you know you have a big expense coming up, you should budget for this ahead of time so you can leave your emergency fund alone.

When you do withdraw money from your emergency fund, take steps to replenish it as soon as possible so you're ready for the next emergency. Figure out how much you need to add to it and set savings goals once again until you've gotten your emergency fund back where it's supposed to be.

Schedule some time to review your emergency fund every year as well, even if you haven't withdrawn any money from it. Your lifestyle can change over time. Things like getting a raise or adding or removing a family member from your household can affect how much you need to keep in your emergency fund, so adjust accordingly.

An emergency fund may not solve all your problems in a recession, but it can at least help you avoid debt that can lead to an even bigger financial nightmare in the future. So if you don't already have one, try the steps above to start building yours today.

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