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How Much Cash Do You Need to Stay Ahead During A Recession?


How Much Should I Spend on A Monthly Car Payment?

July 31, 2022

Inflation is soaring to historic levels. The feds have raised the interest rates, which makes the cost of purchasing big ticket items even more expensive. All of us are experiencing "sticker shock" when going to the grocery store or filling our gas tanks. The stock market is figuring it out and it's important to remember that this too shall pass, and we have been here before even though when living in it, it feels different. The crypto currency market is similar. The possibility of an upcoming recession is more of a reality than a possibility, but it's not guaranteed.

Most Americans are curious as to how much cash they should have on hand to live off of if they get laid off. The amount of money that you will need to stay ahead during a recession has specific variables. The figures will vary depending on your circumstances and the stage of life that you're currently in. For example, you could be part of a multiple income household, a single earner, a small business owner, or a retiree. Multiple income families don't need to save as much as a person with only one income. Financial planning "101" advises us that multiple income families should try to save anywhere from three to six months of living expenses. That number moves to the higher end of six months of reserves for people who are on their own. A good rule of thumb is to have enough money put away so that you can sleep at night based on your own level of comfort and circumstances.

The goal for a working individual should be to have enough cash on hand to provide an emergency buffer that will protect you against any downfalls that could negatively affect your financial health. Entrepreneurs typically face more economic based uncertainty when compared to people who are employed by an organization. That means they should have enough cash available to cover both personal and business expenses. In addition to the 3-6 months of personal expenses, entrepreneurs and small business owners should have a minimum of one year's worth of business expenses available in cash. The biggest reason small businesses fail is being undercapitalized and organizations that had some money put away were better equipped to tough it out during the Covid pandemic shutdown.

Setting enough cash aside to provide peace of mind is always a smart idea whether you're just starting your career, are planning to retire soon, or have already retired. The question at hand is how do you go about saving that much money? First and foremost, you should establish an emergency fund. Think of it as having to react to a major home repair, or an unexpected cost that was not planned. That's exactly why you need to start saving an emergency fund. In essence, an emergency fund is the money you've saved up for the sole purpose of helping you get through your day-to-day living during any financial hardships. There are great vehicles available for this type of account, and you should discuss some basic strategies with your Private CFO.

Perhaps your employment hours have been cut back, you've lost your job, your business isn't making any or as much money, or you made some poor financial decisions? An emergency fund will provide you with a much-needed safety net to fall back on. That way you can ride the wave and emerge from the recession back on your feet without wiping out all of your savings or using up all of your credit. As mentioned above, try to save upwards of 6 months' worth of your wages. When money is tight, you won't have to rely on credit because using credit as a safety net is a huge economic mistake that can haunt people for years down the line.

Most people don't foresee the reality that they will need a larger income than they currently have to both repay the money (plus interest) that they borrowed during the rough patch. It can feel like shoveling sand against the tide. Tough times typically last longer than most people think. Debts accrued during these difficult times are always greater than anticipated. Since most people are used to living on their entire paycheck, they don't have anything extra to repay this debt. So, they have to either increase their income or significantly downsize their lifestyle to afford repaying the debt at their current income level.There is never a better time to establish an emergency fund than now. This will allow you to keep your important investments intact, as it is always time in the market, not timing.

The next step is to establish a budget that will provide you some room to pay down your debts. Carrying debt is a burden on your finances even during good times. Jobs tend to be scarce, and money tends to be tight during a recession. High debt payments add more stress to an already incredibly stressful situation. Now is the time to look at your financial situation including your debt obligations so that you can make a plan to pay down your debt. It tends to be a bit hard to cover your day-to-day expenses during a recession when money is tight.

You certainly don't want your debt to have a negative impact on your life during a recession and the good news is it doesn't have to. Reducing your debt now reduces the risks of even a slight change in external factors that could affect your ability to pay your debt. Pay what you can now. That way a job loss or interest rate hikes during a potential recession won't affect you. So, how can you accomplish this? Start by establishing a budget that accurately reflects the money coming into your household, and where that money is supposed to be allocated to.

If you're not currently paying down your debt as aggressively as you could, or are adding to your debt, having a budget will help you identify spending areas where you can cut back on so more of your money can go towards paying down your debt. It also helps if you diversify both your income and your assets. First and foremost, relying solely on a particular job for all your income tends to be a bit risky. For example, if you lose your job during a recession, you'll also lose your only income source. That will make it more difficult to meet your financial obligations. However, having multiple streams of income can really help. For example, if one income source starts to dwindle - or gets eliminated completely - you have other sources to fall back on that will keep you afloat. Diversifying your income doesn't necessarily mean that you need a second job - in fact if your spouse is working in a different industry than you, you have some income diversity right there.

If you'd like to stretch your wings and bring in some more income you can investigate many different options such as renting out a room in your home, renting out a space in your garage, or going so far as to buy a revenue property and rent it out. People with flexible schedules should consider getting a weekend job. In addition, if you have a particularly strong skill set or are developing one, you can look for ways to cash in on those skills. For example, if you're a strong writer you can look into freelancing articles and blog posts and there are numerous opportunities for that.

If you're crafty you can sell your creations on Etsy and other online platforms, and if you're handy around the house you can consider advertising your services on Craigslist. Don't let these examples limit you, though. Any skill or talent you have could potentially be turned into a way to earn extra income. In addition to diversifying your income, it's also key to diversify your assets. For example, if you have most of your money invested in the stock market and stocks in general are underperforming, it can lead to a reduction of your assets

However, if you spread your investment money over a variety of investments then the odds significantly increase that some of those investments will be profitable at all times. For example, instead of having your funds invested solely in stocks, you should try investing in real estate as well. This can bring in monthly income that you could use towards rent. You can start small by purchasing a condominium and renting it out to a couple or young family.

In conclusion, it's incredibly important to recession proof your finances by preparing ahead of time. In essence, always having a sufficient emergency fund in cash available, lowering your debt, and diversifying both your income source and investment strategy will all go a long way in helping you keep up and maybe even stay ahead during difficult times. It's all achievable if you prepare for it and know what to expect. When your finances are under control during a recession, you'll be able to live without the stress that most people end up experiencing.

If you would like to receive more information on making smart money moves for your future, be sure to contact us today!


Guide to building a 6-month emergency fund

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