Worried about the job market? It's time to build emergency savings

If clients are worried about rising unemployment and economic uncertainty, it is a good time to remind them about emergency savings, advisors say.

Getting laid off is an increasing concern in some sectors, and the potential time that could be spent finding another job means that having some extra cushion is not a bad idea. That’s especially the case when liquid assets can be earning 4 percent or more.

But how much cash people should squirrel away is up for debate.

Advisor Catherine Valega, founder of Green Bee Advisory, said she is recommending having savings to cover as much as 18 months of expenses.

“I have always been a more conservative advisor,” Valega said. “I have never believed in three to six months of expenses” as a target.

Beyond having working capital in a convenient place like a bank account, extra funds can be getting 4 percent or 5 percent in high yield savings accounts or good rates in money markets or Treasury Bills, she noted.

“It shouldn’t be painful. Our savings are earning something for us now,” she said. “It’s kind of a weird sweet spot that we’re in right now, where our cash can be doing pretty well.”

Another advisor, Niv Persaud, managing director at Transition Planning & Guidance, said she recommends that dual-income households have nine months of expenses in emergency reserves and 12 months’ worth for single-income households.

“If a client anticipates being laid off, I encourage them to build their emergency reserve, cut unnecessary spending, explore health insurance, and begin searching for a new job,” Persaud said in an email.

People should consider how long it could take to find a new job and save accordingly, she said. That varies by sector, seniority, and income level.

“If they are self-employed, it may take over 12 months to end their business and find new employment,” she said. “Also, the job search process is longer for higher-income individuals, especially if they manage people and a P&L.”

Considering where to reduce spending is also useful for people facing the possibility of a layoff, said Nycole Freer, owner of Eden Financial.

“I would explore where they can cut back in their budget,” Freer said in an email. “I would see where all their money is currently being held such as in the bank, investment accounts, retirement accounts, etc. and be creative on where to draw money from to pay bills and expenses if there is a deficit from unemployment and severance.”

Most of Valega’s clients are women who own businesses, she said.

“I am starting to hear rumblings of the tech markets slowing down,” she said. That has led to some people in the tech sector rethinking what they might do for income in the future, she noted.

The high income levels in tech can also make people more vulnerable after layoffs if they also have high costs of living – it can take longer to find a new job that pays similarly, she noted.

Meanwhile, layoffs affecting critical workers, like nurses or others healthcare positions, are still difficult – but finding employment is less challenging, she said.

While having a year and a half of expenses saved is conservative, it gives people options, she said.

“If something were to happen, you don’t just have to jump” to the first job that is offered, she said. “I like my clients to have a little more room and flexibility in their choice of career or next steps.”