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Here’s how much cash you need for a recession, according to advisors

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With the threat of a recession looming, more financial experts are sharing how to prepare — including how much cash it would be smart to put aside.

The end of June saw six turbulent months for the S&P 500, which has fallen more than 20% since January, capping its worst start in six months to a year since 1970.

The future may be uncertain, but stock market volatility, high inflation, geopolitical conflict and supply chain shortages have dented Americans’ confidence in the economy.

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In fact, more than half of Americans are now concerned about the level of their emergency savings, up from 44% in 2020, according to a June survey by Bankrate.

Many are wary of default: Bankrate has found that nearly a third of Americans have less than three months of spending in savings, and nearly a quarter have no emergency funds.

Although lower yields have made cash less attractive over the past several years, that may change as interest rates rise. Experts say there is value in the peace of mind that the savings bring.

Here’s how much cash savings you need at different times in your career, according to financial advisors.

Dual Income Families: Save at least 3 months

Christopher Lehman, a certified financial planner with Allied Financial Advisors in Newtown, Pennsylvania, said the typical recommendation for dual-income families is three to six months of savings on living expenses. Logic: Even if someone’s earning loses their job, there are other sources of income to help the family keep up with the expenses.

Solo earners: Set aside 6 months or more

However, Lehman said single-parent families may benefit from increasing savings to the equivalent of six to nine months of expenses.

For both single-income and dual-income families, some advisors say it’s best to have higher cash reserves to provide “more options” and greater flexibility in the event of a job layoff. Recessions usually go hand in hand with Unemployment is high, and finding a new job may not happen quickly.

Catherine Valleja, a CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts, suggests keeping 12 to 24 months of expenses in cash.

Personal finance expert and best-selling author Sus Orman also recommended extra savings, and recently told CNBC that it pays for 8 to 12 months of expenses. “If you lose your job, if you want to leave your job, that gives you the freedom to keep paying your bills while you think about what you want to do with your life,” she said.

Entrepreneurs: Set aside one year of expenses

With more economic uncertainty, Lehman recommends entrepreneurs and small business owners try to set aside one year of business expenses.

He said, “Following this advice has saved a good number of our business clients from shutting down due to the pandemic.”

Some people feel uncomfortable having so much money “on margin” and not earning anything, especially at the moment when stocks seem to offer a great buying opportunity.

Christopher Lyman

Certified Financial Planner by Allied Financial Advisors, LLC

Pensioners: reserve 1-3 years of expenses in cash

With high inflation and relatively low interest on savings accounts, selling large amounts of cash can be difficult for some retirees. However, experts suggest keeping expenses from one to three years readily available.

“Having an adequate cash reserve is a critical component to making your money last in retirement,” said Brett Koepel, CFP co-founder and founder of Eudaimonia Wealth in Buffalo, New York.

You can have enough cash on hand Reducing the need to sell assets when the market is plummeting, a wrong move that can deplete your retirement balances faster.

Of course, the exact amount of cash to keep in retirement depends on your monthly expenses and other sources of income.

For example, if your monthly expenses are $5,000 per month, and you receive $3,000 from pension and $1,000 from Social Security, you might need a smaller amount of cash, around $12,000 to $36,000.

“This allows you to maintain your long-term investment without the risk of selling when the stock market is down,” Koppel said.

Savings is a very emotional topic.

There is some flexibility in the “correct” amount. Lehman admits that money is a “very emotional topic,” noting that some clients deviate from his savings recommendations.

“Some people are uncomfortable with having that much money ‘on the sidelines’ and not winning anything, especially at the moment when stocks seem to provide a great buying opportunity,” he said.

Others, Lehmann said, were “cautious” before and are now “extremely concerned about the market,” which incentivized them to save much more.

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