Suze Orman Warns Your Emergency Fund May Not Cut It. Here's Why

It may be time to rethink your approach to your savings.

No matter where you live or how much you earn, it's important to have cash in your savings account for unexpected expenses, or to help you get through a period of unemployment. Now the old convention was to save enough money to cover three to six months of essential living costs. But since the pandemic, some financial experts have changed their tune on emergency funds and now advise socking away even more money.

Suze Orman is one of them. In fact, she thinks it's a good idea to save enough money to cover eight to 12 months of living expenses. 

But even if you think you've managed to hit that goal, you may still have work to do. In fact, during a recent podcast, Orman insisted that consumers should now rethink their emergency savings for one big reason.

Have your living costs climbed?

You may have noticed that everything from gas to groceries to utilities is costing more money these days. And that means you may not have enough money in your emergency fund to cover yourself for eight to 12 months, or however many months of replacement income you're looking to have.

If you've had money sitting in savings for a while, chances are, you calculated your monthly needs at a time when your living costs were lower. But now that living costs are higher across the board due to inflation, it's probably time to crunch those numbers again and see where you land.

So, let's imagine your goal is to have enough money in your savings account to pay for eight full months of bills, and that as of this time last year, you were spending $4,000 a month on essentials. If you're sitting on $32,000 in emergency savings, you might assume you're in great shape. 

But what if it's now costing you $4,300 a month to cover your bills as a result of inflation? For eight months' worth of protection, you'll need $34,400. And so if you only have $32,000, you may be short of your personal savings goal (though to be clear, a $32,000 savings balance is still impressive in its own right, and it might still do a good job of getting you through a layoff or series of unplanned bills).

Make sure you're covered

Like many financial experts, Orman is worried that a recession may be imminent. This isn't to say that economic conditions will decline next week or next month, but it's not unreasonable to think we might enter a recession late this year or early next year. Once that happens, your job may not be as secure as you'd like it to be, so it definitely pays to shore up your finances while you can. And one good way to do so is to recalculate your emergency fund needs.

If you find that you're short of meeting your goals, you can take the opportunity to try cutting back on spending to beef up your savings. Or, you can boost your income with a side job if you'd rather not give up the small luxuries that make your life enjoyable.

It's an unfortunate reality that the amount of money you were spending a year ago on bills is probably a lot less than what you're spending today. And it's important to make sure your emergency fund accounts for that.