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Developing an Emergency Savings Plan for a Recession

Kyson helps people make better personal finance decisions by challenging cliché advice and common misinformation.

Are We in a Recession?

In light of the COVID-19 pandemic sweeping the world, financial experts are talking about a recession. Many people are anxious, scared, and unsure what the future brings. A lot of people have already lost jobs and are facing all sorts of financial difficulties, on top of worry about how to keep themselves and their loved ones safe from the virus.

A recession is technically defined as 6 consecutive months of decline in production and output in a country's economy. Financial experts will talk about complicated numbers and terms like "GDP" and "economic bubbles." What a recession means for most people's everyday lives is simply this: Businesses are struggling and therefore laying people off.

Especially in these uncertain times, it's important to have a robust emergency savings. But whether you are living through a recession or not, the time is always right to think about your emergency financial plan. Do you have enough cash to support yourself or your loved ones if you were to lose your job or have some slower months with your business?

Here are some tips to help you increase your emergency savings!


Step 1: Determine Your Emergency Savings Goal

Many Americans do not have enough cash saved to survive a financial emergency, like a large repair or medical bill, much less enough cash to survive without work for very long.

Popular financial gurus, like Dave Ramsey, recommend that if you have any debt (credit cards, car loans, student loans, etc) you should save up $1,000 in emergency savings and put the rest of your income toward paying off debt. This is bad advice. $1,000 is simply not enough for most people. A true emergency might mean that you need to come up with enough cash to pay for your rent/mortgage and food, for several months, without any income. $1,000 will not get you very far. A paid-off credit card can't pay your rent.

A better rule of thumb is to decide on a savings goal that is most comfortable for you, and meets your personal needs and concerns. Would you feel secure with enough cash to help you survive 1-2 months without income? If you are out of debt, most financial experts recommend saving enough to pay 3-6 months of your necessary costs.

To figure out your target number: Look through your budget and identify the things you absolutely will have to pay for during a financial emergency. Typically this will include "fixed" costs like rent or a car loan payment, as well as "variable" costs like food and utilities. Add up the amount you will probably spend on each of those every month, and multiply that total by the number of months you want to save for.

TIP: You should be liberal in your estimates, and estimate your variable expenses on the high end--hopefully you can tighten your grocery budget in an emergency, for example, but for right now assume your costs stay the same as they are right now. Better to over-save than under-save.

For example (a family of two adults):

Food (~$500/month) + Rent ($1000/month) + Household items ($400/month) + Utilities ($300/month) +Transportation ($400) + Incidentals like health ($200) x 2 months of emergency savings= $5,600 is your savings goal.

Step 2: Make a Plan for Reducing Expenses in a Crisis

As I said above, you should give yourself generous cost estimates when determining your savings goal. You might need to get a new car to drive to job interviews. Your food budget may not be able to be reduced.

However, you should make a tentative plan for ways you might reduce your expenses during an emergency. It's good to talk to your partner or household about this ahead of time. It would be unfair and a source of unnecessary discord for one person to make unilateral decisions in a crisis.

Some changes you might make to your budget in a crisis:

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  • Cut out cable or internet and use your phone for internet access.
  • Move in with family
  • Sell a vehicle

Decide ahead of time which of these actions you might be willing take to make your emergency savings go further.

Step 3: Reduce Debt Payments

Financial advice personalities who focus on debt think you should put all your extra income into paying off credit cards and loans. While paying down your debts is an important and valuable goal, you should not pay more than you have to on your debts until you have reached your personal emergency cash goal. Here are a few ideas:

  • Pay only the minimum payments on your loans and debts.
  • Consolidate your credit cards with a balance-transfer credit card that has a promotional 0% interest period. A few (often 12-18 months) months without interest will reduce your overall minimum payments and give you more cash to put into savings.

TIP: Debt consolidation loans might be a good option in some cases. It could reduce your monthly payments to consolidate all your student loans, for example, but they often come with less flexible terms. has some helpful resources for finding the right lender for your circumstances.

Step 4: Take Advantage of Recession Relief Programs

During national and global economic crises, the government, and banks, will often offer temporary provisions to help people save some extra money in order to survive. During the COVID-19 pandemic, the US government has instituted several programs to help the average person. Be sure to take advantage of these, even if you have not lost your job, to help you reach your savings goal faster:

  • Request student loan forbearance. During the COVID-19 pandemic, the US government has made it possible for anyone to request forbearance and skip a couple of loan payments, but you need to request it. Contact your loan servicer to request this forbearance, and put that extra cash into your emergency savings plan.
  • Contact your bank and ask if you can skip a mortgage or credit card payment or two. If you do lose your job, be sure to ask again about some of these provisions. Some banks will offer you mortgage forbearance only if you lose your job or your business is directly impacted by the crisis, for example.

Step 5: Choose the Best Location for your Savings

Most banks these days are offering really low interest rates on savings accounts. Ideally, you at least want your savings to keep up with inflation (around 2-3%) so that, if it is just sitting there, it will still be worth as much in 5 years as it is today. It's hard to find an interest rate that high these days.. However, some banks are better than others.

  • Local credit unions, or online banks like Ally, sometimes offer better interest rates. keeps an ever-updating list of banks with the best interest rates.
  • You could also open a brokerage account and keep some money there in cash (as opposed to the stock market), which often can give you a better rate in a money market than a traditional savings account. A financial advisor can help you do this, or you can open up an account yourself online with a major brokerage firm like Vanguard or Merril Edge.

Step 6: Take a Breath!

In all cases, be sure to care for your mental and emotional health! You will not make wise financial decisions, either in preparation or during a crisis, if you are not taking care of yourself. If possible: Take some deep breaths, take a walk, take a nap, or do something you enjoy, before working on your financial plan or dealing with a crisis.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.


Kyson Parks (author) from San Diego, CA on April 19, 2020:

I'm so glad, thank you!

Helen Manongyao from Philippines on April 18, 2020:

Very helpful, this will definitely help me in my saving journey.

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