Many experts expressed concern that the U.S. would go into a recession in 2023, in part due to the Federal Reserve increasing interest rates to fight inflation. Despite these fears, no recession has materialized yet and concerns are waning as the economy continues to grow at a slow but steady pace.
Still, economic recessions are an inevitable part of life, they will happen eventually, and there remains a chance that one could come soon. If you are worried about how your financial life would withstand a recession, you'll probably want to put some money into a high-yield savings account to see you through the tough times.
But just how much should you have saved? Here's what you need to know to help you decide.
Save enough to cover several months of living expenses
One of the biggest risks of a recession is that you will lose your job, not be able to find another one quickly, and end up not being able to cover your bills.
To avoid that, set aside enough money in your bank account to cover several months of living expenses. The exact number of months is going to depend on just how stable your job is and how long it would take you to find a new one.
The good news is, historically, recessions have not lasted for a long time. On average, since 1950, recessions have lasted around 10 months with these downturns spanning between two months and 18 months. So, if you wanted to be pretty conservative, you could opt to save 10 months of living expenses, as that would be enough to get you through the average recession.
Of course, you don't necessarily need enough savings to cover you during the entire downturn as you might be able to get a new job before the recession ends. As of September 2023, the average length of time unemployed was 9.2 weeks. While periods of unemployment generally last longer in a recession, chances are still good you'd probably find a job in less than 10 months.
If you work in an industry most likely to be impacted by a recession such as retail, the hospitality industry, travel and tourism, real estate, restaurants, or manufacturing and warehousing, then erring on the side of caution by saving enough to cover 10 months of living expenses might be smart.
Otherwise, the standard recommendation of saving three to six months' worth of expenses is most likely the way to go to strengthen your personal finances.
Don't go overboard when saving for a recession
The reality is that recessions are a part of life. You're going to encounter them several times throughout your adult life. But, while it's good to be prepared for them -- or for any surprise expenses -- you don't want to go overboard or panic.
Instead, prepare for them like any other unexpected expense like a medical emergency or a period of unemployment. Having three to six months of living expenses set aside should be enough for most people to get through tough times with their finances unscathed.
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