With inflation and the looming possibility of a recession by 2023, you might be wondering how bad the economy is and how much cash you should have on hand. Interest rates are also rising, which means you’re paying more interest than in the past on a student loan, car loan, credit card, or mortgage. Energy, housing and food prices are still rising, making you spend more on them than ever before.
Read: States whose economies are failing vs. States whose economies are thriving
Also: 5 things to do when your savings hit $50,000
Because of these factors, it’s important to have some savings on hand. How much is necessary? We’ll break down exactly how much you should have in your emergency fund and how to get there.
What is the magic savings number?
The amount of emergency money you should have depends on your income and needs. Emergency cash should be money you have in a savings account, not cash sitting on the stock market or in a 401k. The purpose of the emergency fund is to use it in – you guessed it – emergencies. This means layoffs, sudden expenses, and anything else costly you might not have anticipated.
How much you should have on hand should range anywhere from three to six months of spending, according to financial experts. This may seem like a very high number to save, but remember this amount should cover the basics. Think about what you really need in a month: rent, ancillary costs, insurance costs, mobile phone bill, Internet bill, etc. You cannot do without them. If it still seems high, just think about reaching three months’ spending. Six months doesn’t have to be a priority if it really isn’t achievable.
Take our poll: Do you believe in quiet cessation?
How did you get this number?
There are many ways you can earn your emergency fund. One is to take a seasonal or part-time job to supplement your income. Think of activities you enjoy doing and see if there’s a way to monetize them. Once you start earning the extra money, devote it entirely to your emergency savings.
If you want to work with your current income, download an app to help you budget and save. Apps like Mint, YNAB, or Goodbudget are all apps you can use to track your spending and find ways to save extra money. Each app specializes in different budgeting methods, so try a few to see which works best for you. After all, if you don’t like the way an app works, you won’t use it. Find someone you really understand and are attracted to.
Check your current expenses
It’s a good rule of thumb to take a look and compare your insurance benefits once a year. Insurance premiums fluctuate so you may miss out on a better deal from another provider. The same applies to your internet costs. Call your ISP at least once a year to see if there are any special offers you can take advantage of to lower your monthly fee.
Once you take a good look at your budget, you’ll see where you can cut your spending. Do you spend $300 a month on takeout? Plan to cook more at home and get that number down to $100 a month for takeout, then put the extra $200 into your emergency fund.
When you live with a partner and own more than one car, those expenses can really add up. The average cost of owning a car can be more than $10,000 a year, including maintenance and gas. Think about how often each of you drives and if you could cut down to one car. If public transport is good where you live, this could be a great option to save thousands a year that you could put into an emergency fund.
pay off debts
Especially when interest rates are rising, it is wise to prioritize paying off your debt as much as possible. Start with the debt with the highest interest rate and go from there. Many financial experts believe that paying off debt is just as important as building an emergency fund. If you can, it’s wise to do both at the same time. Take half of the extra money you earn and invest it in savings while you use the other half to pay down your debt. Soon you will have no debt and a healthy savings account to bail you out of tight financial situations.
More from GOBankingRates
This article originally appeared on GOBankingRates.com: How Much Emergency Cash Should You Have for 2023?