52% of Americans Are Making This Essential Move to Prepare for a Recession -- and You Should, Too

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  • Many financial experts are convinced that we're headed for an economic downturn.
  • One important move on your part could help you manage your bills and avoid debt if you lose your job.
  • Building an emergency fund is a key financial move any time, but especially in the face of a recession.

It could really help you get through a downturn.

Is the U.S. economy headed into a recession in 2023? Some financial experts seem convinced that's the case. The Federal Reserve has been hiking up interest rates to encourage a slowdown in consumer spending. That's really the most effective way to put an end to rampant inflation.

But the danger in the Fed's interest rate policies is the potential to fuel a major decline in consumer spending, not just a modest one. And if spending drops to a drastic degree, it could spur an economic downturn. That could, in turn, lead to widespread job loss -- and the loss of many paychecks.

In a recent survey by Clarify Capital, most respondents believe a recession could lead to layoffs. And 52% are making one key move to prepare for that -- building an emergency fund.

Your savings could really bail you out

If you lose your job through no fault of your own, you're generally entitled to unemployment benefits (assuming you're not self-employed, of course). But those benefits won't replace your entire paycheck -- only a portion of it. And that portion may be pretty small, depending on your state's formula and maximum benefits.

That's why it's so important to have cash reserves to fall back on. If your monthly expenses cost you $3,000 and your unemployment benefits max out at $1,800 a month, you'll be looking at a $1,200 shortfall. But if you have an emergency fund to tap, you can make up that difference without falling behind on bills and/or racking up costly credit card debt to stay afloat.

Plus, if you're self-employed, you're generally not entitled to unemployment benefits. So in that case, you really need savings in the event that your workload dries up and your earnings completely stall.

How much savings do you need to get through a recession?

In general, it's a good idea to have enough money in your savings account to cover a minimum of three months' worth of bills. But the more months of expenses you're able to cover, the more financial protection you'll buy yourself.

When you lose your job in a recession, it can take longer than usual to find a new one. So you may want to aim for more like six months' worth of living expenses in savings.

READ MORE: Emergency Fund Calculator

Of course, if you're starting with, say, a few hundred dollars in the bank, it's unlikely you'll have six months of expenses socked away by the start of 2023. But in that case, do the best you can. More money in savings is better than less, no matter what your account balance actually looks like.

We're not guaranteed to experience an economic downturn in 2023. But it's a possibility everyone should prepare for. And if you make an effort to build emergency savings, you should be able to sleep better at night knowing you have a cash source to tap if your personal financial situation takes a turn for the worse.

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