Suze Orman Now Says You Need That Much in Emergency Savings (and psst: You Probably Won’t Like It)

Author and financial guru Suze Orman

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Financial experts have always urged people to build an emergency savings fund, but exactly how much should be in that fund has never been cut and dried. Suze Orman recently reviewed her advice on how much you need in an emergency fund to cover expenses between 8 and 12 months to 12 months. The reason? There is a potential recession on the horizon, he says. “You know my hope is that you can manage to set aside enough money to cover 12 months of basic living expenses. And you also know that I realize this can take time. Every month you get closer to your (new) goal is a month to celebrate your progress.” You can see the best rates you can get on savings accounts here.

If that number gave you a “castaway” feeling, you’re probably not alone. A survey released in 2021 by Bankrate found that more than half of Americans don’t have even three months of expenses in an emergency fund. So some professionals say it’s okay to aim for less than 12 months of expenses.

“If we could just get people to accumulate 3 months of net income, we could save a lot of people from ruin,” says certified financial planner Craig Carnick of Transform Wealth, who adds that this 12-month goal can be especially difficult for those with large debts such as student loans.

And Alvin Carlos, a certified financial planner at District Capital Management, says 12 months is too much for most people. “It may only be suitable if you want to change careers and expect to be unemployed for a few months. Five to six months is usually sufficient as an emergency fund,” says Carlos.

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Of course, 12 months of net income after taxes is nice in an emergency fund, but Carnick says what may be even more important is creating a plan to address the savings situation, as well as a quick cash flow analysis for to give priority to what can reasonably be done.

Your age, marital status, and career play a role in determining how much emergency savings you should personally have stashed away. Certified financial planner Curtis Crossland of Suttle Crossland Wealth Advisors says if you’re retiring or about to retire, you want to have between 12 and 18 months of living expenses set aside. “The goal with this amount is to buy time for markets to recover or economic conditions to improve and allow you to avoid having to touch investments,” says Crossland.

Married couples still in their careers want 3 to 6 months of savings, but probably closer to 6 if income is uneven, Crossland says. “You can get to a point where you have a lot more cash than is needed in an emergency fund and that will be a cash drag on your overall portfolio. Everyone has different conditions and needs, so I usually don’t agree with a 12-month blanket for everyone,” says Crossland.

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If you’re wondering where or how to start building an emergency fund, Orman says, “I recommend taking the time to review your bank and credit card statements for the past three months and reestimate your monthly necessary living expenses.” Carnick says going back three months can make sense because it means you should be able to cover expenses that aren’t billed monthly, like quarterly insurance payments. “Then, considering a longer period of time will also cover expenses that aren’t normal, like auto repairs, insurance premiums, dental visits, and big purchases. At our practice, we actually ask clients to go back a year,” says Carnick.

When calculating basic living expenses such as mortgage, food, utilities, insurance, health care and anything required to keep you and your family in your current physical condition, it is also important to list your non-essential expenses such as food, fun, clothes and travel, but not to cut them. “The most effective way to build cash reserves is to eliminate high-interest debt from credit cards or old student loans. Certainly, eliminating unnecessary non-essential expenses like a new 65-inch TV would make sense,” says Carnick.

As for the timeframe in which you should be sure to have wasted significant savings, Orman predicts that a recession is likely and therefore hastens an urgent need for emergency savings. “If you manage to increase your savings, don’t delay. The risk of us slipping into recession in the coming months has increased with the Federal Reserve’s latest move.”

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Crossland also says a recession is a legitimate concern. “Whenever you have a high level of inflation and you see measures of economic growth falling, you worry that you’re already in a recession and you’re just waiting for the late data to confirm that,” says Crossland.

Of course, no one can guarantee whether or not we’re slipping into a recession, but if we are, says Carnick, “individuals should be doing the same thing as if there was no recession anywhere on the horizon, and the first step is to create comprehensive financial plan”.

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