You might be wondering how much cash you actually need to have on hand if the stock market volatility, high inflation, and rising interest rates are making you feel shaky.
However, according to financial experts, the ideal amount to have in your emergency fund depends on your family’s demands and condition.
However, it is understandable why investors are concerned about savings given that two-thirds of Americans are concerned about a recession.
According to a June survey from Bankrate, more than half of Americans are now worried about their amount of emergency funds, up from 44% in 2020.
According to a study by Bankrate, roughly one-third of Americans have savings accounts with less than three months’ worth of spending, and almost one-quarter have no emergency fund.
Although historically low returns have made cash less desirable, this may be changing as interest rates rise. And according to experts, the peace of mind that savings gives is valuable.
According to financial gurus, you need the following amount of cash saved up at various stages of your career.
Dual-earner household: Set away enough money for at least three months’ worth of spending
According to Christopher Lyman, a certified financial planner at Allied Financial Advisors in Newtown, Pennsylvania, the standard suggestion for dual-income families is savings equal to three to six months’ worth of living expenditures. The justification is that the family can still cover expenses even if one person loses their job because there are other sources of income.
Individuals: Save up to six months
However, Lyman noted that families with a single earner would benefit from increasing their savings to cover six to nine months’ worth of spending.
Some financial experts advise having larger cash reserves for both single-earner households and dual-income households so that there are “more options” available in the event of a job loss. Finding a new job may not be easy during a recession because of increased unemployment rates that are often associated with them.
Keep 12 to 24 months’ worth of spending in cash, advises Catherine Valega, a CFP and wealth counselor with Green Bee Advisory in Winchester, Massachusetts.
Suze Orman, a best-selling author and personal finance guru, recently told CNBC that she advocates for having eight to twelve months’ worth of spending in savings. “If you lose your job, if you want to leave your job, that gives you the freedom to continue to pay your bills while you’re figuring out what you want to do with your life,” she said.
Entrepreneurs, set aside one year’s worth of business costs
Lyman advises entrepreneurs and small business owners to strive to set aside one year’s worth of business costs since there is increased economic uncertainty.
“Taking this advice saved quite a few of our business owner clients from shutting down due to the pandemic,” he said.
Retirees: Maintain 1 to 3 years’ worth of cash reserves
Large sums of money might be hard to convince some retirees to part with given the rising cost of living and the paltry return rates on savings accounts. But experts advise maintaining one to three years’ worth of spending on hand.
“Having a sufficient cash buffer is a critical element to making your money last in retirement,” said Brett Koeppel, a CFP and the owner of Buffalo, New York’s Eudaimonia Wealth.
Having enough cash on hand might reduce the urge to sell investments during a down market, a mistake that could cause your retirement funds to deplete more quickly.
Naturally, the precise quantity of money you have on hand in retirement relies on monthly spending and additional income streams.
For instance, if your monthly expenses are $5,000, you receive $1,000 from Social Security and $3,000 from a pension, you may only need between $12,000 and $36,000 in cash.
“This allows you to maintain your longer-term investments without the risk of selling when the stock market is down,” Koeppel said.
Savings is a “very emotional topic”
Flexibility exists in the “right” amount. Lyman acknowledges that money is a “very emotional topic,” noting that some of his clients deviate from his savings advice.
“Some people are uncomfortable having that much money ‘on the sideline’ and not earning anything, especially right now when stocks look to be providing a great buying opportunity,” he said.
Others who were previously “cautious” are now “thoroughly worried about the market,” which prompts them to increase their savings dramatically, according to Lyman.
