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  • Personal finance experts urge building an emergency fund ahead of a likely recession in 2023.
  • The recommended emergency target, of three to six months’ expenses, is hard to reach.
  • But cutting spending and increasing income through different streams can get you there, experts say.

With economists sounding the alarm ahead of a likely recession in 2023, it’s time to start thinking about how your finances will be affected by movements in the wider economy.

The key to bulletproofing your finances is having an emergency fund. Five personal finance experts explained to Insider how to build one.

What is an emergency fund?

An emergency fund is a reserve of ready cash for use in times of trouble. It’s different than money tied up in investments like an index fund, which are harder to access, more volatile, subject to withdrawal costs on profits, and generally regarded as longer-term assets.

The idea of the emergency fund is to have some low-risk savings that are quickly and easily accessible in times of crisis and, aside from the effects of inflation, are less at risk of severe devaluation at the point you need them.

With a recession highly likely in 2023, according to Bloomberg economists, it’s even more important to have reserves.

How big should my emergency fund be?

The experts interviewed by Insider agreed that an emergency fund should cover between three and six months’ worth of expenses — a consensus supported by Well Fargo. This amount would cover costs in the event you lose your job unexpectedly and need to find a new one.

For most, that’s likely to be a tall order. The average American household’s expenses totalled $66,928 in 2021, per the Bureau of Labor Statistics (BLS). That means the typical emergency fund should be between $16,732 and $33,464 to cover the advised period.

But Ramit Sethi, founder of I Will Teach You To Be Rich, says that number is misleadingly high, as you tend to cut out lots of unnecessary spending, like eating out and clothes shopping, during a crisis. Instead, Ramit says, you should calculate a “keep the lights on” number.

“It’s like if your phone goes into low power mode, it stops doing all this extra stuff. You want to find out the same thing for you,” Sethi said.

How can you get there?

A recession may be coming – but it hasn’t happened yet. With the economy still in relative health, and the labor market cutting unemployment again in October, there are opportunities to materially change your financial position before a downturn strikes.

Andrea Woroch, a personal savings expert, told Insider it’s important not to be intimidated by the multi-thousand dollar target, but instead work to build up your first $1,000 in savings and go from there.

Download — and start using — a budgeting app

Steve Chen, founder of Call to Leap, a coaching platform for trading, investing and financial planning, told Insider it was important to start small with behavioral changes to your finances.

The first should be downloading a budgeting app to understand where your money is going, Chen said. Mint or Rocket Money are a couple that help automate and trim your outgoings.

Chad Rixse at Forefront Wealth Partners said: “If it’s easy and intuitive for you, then there’s a much higher chance that you’ll stick with it and use it regularly. Consistency is the key here.”

From there, the experts said, it comes down to the simple arithmetic of cutting spending and increasing savings.

Take account of home and vehicle costs

Jeremy Schneider, founder of the Personal Finance Club, suggested your vehicle should be the first thing to look at when assessing where you can make big savings. 

“Netflix is 12 bucks a month or whatever. And that isn’t your problem. Your problem is your $650 payment on your truck that’s sitting outside. Your problem is your $2,000 rent. And so the options are things like getting a roommate, or downgrading your car,” he said.

Many households have more than one vehicle, and selling one would cut running costs drastically. That’s what Chen and his wife did when they realized they only needed one car between them.  

As for your home, renting out a spare room or making plans to downsize now can help you feel more comfortable by the time a downturn comes, they said.

Don’t forget the small things

Small expenses, like streaming subscriptions, can often be the easiest places to start cutting back. Because they’re often automated, it can be easy to passively allow unnecessary expenditures every month, Rixse said.

The budgeting apps, like Rocket Money, are a good place to start, and help you track how much you use your subscriptions.

“A lot of people don’t know what they pay per month for that kind of stuff because it gets lost in the shuffle of their everyday transactions,” Rixse said. “Just going through and reviewing your expenses and what things you don’t use and could cut out is a good way to quickly reduce your expenditure.”

Fine-tune your essential spend

You can also make savings on essentials even if you can’t cut them out entirely. Food costs, which jumped 11% in the past year, per BLS data, are a good place to start.

Woroch said it’s important to build a meal plan before you go grocery shopping to reduce wastage, and look for markdowns and specials.

Cameron Huddleston, an author and director of Carefull, a security service for elderly people’s finances, said bundling insurance and phone bills together can cut costs.

Woroch said by shopping around for her home insurance, she was able to save $1,200. At a time when rising interest rates make it harder to negotiate down mortgage payments, this may be the best option to cuts fixed home costs.

Find other income streams

While cutting your outgoings is more readily in your control, you can also take steps to increase your income in the coming months. The quickest and easiest way is by finding extra employment.

“There’s a limit to how much you can cut, but there’s no limit to how much you can earn,” Sethi said. “So increasing your income is one of the most powerful things you can do to design and live your rich life.”

It’s increasingly easy to freelance if you have experience copywriting, social media or graphic design skills, or knowledge you sell through tutoring. You can easily advertise your time on sites such as Upwork, the experts said. 

If you can’t think of a skill to monetize, babysitting and dog-walking are some of the most obvious examples of a lower-skill side-hustle, the experts said. Otherwise, bar or waiting work, Schneider and Woroch said, can help quickly build up a cash buffer.

If all else fails, selling unwanted items is another option. Chen says he uses OfferUp all the time, while Huddleston said she regularly uses Facebook Marketplace.