Do You Need a Bigger Emergency Fund for 2023?

It could pay to give your savings an extra boost.

Will a recession hit in 2023? There's reason to believe we could be headed for a period of economic decline.

The Federal Reserve has gotten aggressive in its interest rate hikes in an effort to slow the pace of inflation. By making borrowing more expensive, the hope is that consumers will start to cut back on spending. Once that happens, it should bridge the gap between supply and demand that caused inflation to soar.

But the so-called soft landing the Fed hopes to achieve may not happen. Instead, consumers might end up cutting their spending to an extreme degree instead of a moderate one. And if that happens, it could be enough to spur a recession. 

Now, if there's one thing that tends to go hand in hand with recessions, it's unemployment. And while people who find themselves laid off through no fault of their own are generally eligible for unemployment benefits, those benefits won't replace workers' paychecks in full. 

That's why it's so important to have money in the bank for emergencies like a period of joblessness. And so even if you have a decent chunk of cash in savings, it could still pay to boost your cash reserves ahead of the new year.

Do your savings need a lift?

There's no single rule when it comes to building an emergency fund. Prior to the pandemic, the general convention was to save up enough cash to cover three to six months of essential living expenses. But in the wake of the pandemic, a number of financial experts have changed their tune on emergency savings, and are now saying to stash away enough cash to cover up to a year's worth of bills.

Given that a recession could hit in 2023, it may be a good time to beef up your emergency fund if you don't have enough cash to cover 12 months of expenses. Let's say you have a six-month emergency fund. That's definitely a great accomplishment, and one you should be proud of. 

But what if you lose your job in 2023 and it takes you nine months to find a new one? In that case, you might drain your savings before you're gainfully employed again. As such, it wouldn't be a bad idea to boost your cash reserves while your paycheck is still coming in on a regular basis.

How to grow your savings

To boost your emergency fund over the next couple of months, you'll need to not spend your entire paycheck. It's that simple. So think about the non-essential expenses you tend to pay for and identify some to trim, whether it's takeout meals, a subscription box, or a gym membership you don't really need to keep.

At the same time, consider getting a side hustle to boost your cash reserves quickly. Although unemployment numbers could grow in the new year, right now, the labor market and gig economy are strong. You might as well take advantage of the chance to raise your income and bank that extra money while you can.