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The recent failures of Silicon Valley Bank and Signature Bank have made a recession more possible — and that means it’s more important than ever to have emergency savings set aside, according to personal finance expert Suze Orman.
“Because of what is happening with banks, it is obvious that a recession is more likely coming than not,” Orman told CNBC.com in an interview.
Moreover, creditors will most likely tighten their lending standards, which may make it harder for consumers to access new loans or lines of credit, she said.
“Everything is going to tighten up,” Orman said.
Evidence that a shift is underway can already be seen with companies like Amazon announcing mass layoffs, she said.
To prepare for the new economic reality, there is one crucial step individuals should make.
“There has never been a time that as much as right here and right now in the recent past that an emergency savings account is vital, absolutely vital,” Orman said.
Experts generally recommend setting aside at least three to six months’ expenses in case of an emergency.
Orman has made it her mission to get more people to save money in case of emergencies. In 2020, she co-founded SecureSave, a company working with employers to provide emergency savings accounts to employees.
The focus, she said, is not new.
“If you go back through my entire history of almost 40 years now, I’ve been [saying] emergency savings, emergency savings, emergency savings,” Orman said.
But now is the first time that goal is as urgent as it was in 2008, she said.
How your emergency fund deposits are insured
An important part of emergency savings is easy access, which means most people are looking at some kind of high-yield savings account. The recent bank failures have inspired a new focus on whether deposits — including your emergency fund — are insured.
Generally, the Federal Deposit Insurance Corporation guarantees up to $250,000 per depositor, per insured bank, per account ownership category.
For deposits at federally insured credit unions under the National Credit Union Administration, the terms are similar. The typical coverage amount is $250,000 per share owner, per insured credit union per account ownership category.
Consumers should be mindful there are eight categories of accounts to which the $250,000 coverage applies, according to Orman. That includes individual deposit accounts, such as checking, savings and certificates of deposit; some retirement accounts such as individual retirement accounts; joint accounts; revocable trust accounts; irrevocable trust accounts; employee benefit plan accounts; corporation, partnership or unincorporated association accounts; and government accounts.
Of note, you do have to have your money in bank or credit union account to which the federal coverage applies, according to Orman. Investments such as stocks, bonds, mutual funds or annuities are generally not covered by federal insurance, even if you purchase them from a bank or credit union.
The $250,000 limit was established by post-financial crisis legislation in 2010.
However, uninsured deposits above that threshold were guaranteed for the recent bank failures. Both President Joe Biden and Treasury Secretary Janet Yellen have said that could be adjusted again, if the situation calls for it.
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In the meantime, you do not necessarily have to move your money to another financial institution to have deposits over $250,000 insured, Orman emphasized.
Because the coverage is per account category, you may also amplify the amount of insured balances by having different kinds of accounts, such as savings, IRA or trust accounts, she said. Generally, deposit accounts are eligible for $250,000 coverage for the sum of accounts at an institution in this category, which includes checking accounts, savings accounts, certificates of deposit or money market deposit accounts.
However, if you have a joint account where you are a 50% owner, you may get another $250,000 of protection. The same goes if you have a trust account or an IRA account that invests in savings vehicles like CDs or money markets. IRAs invested in stocks, bonds or mutual funds do not qualify.
Additionally, by adding two or more beneficiaries, you can get an additional $250,000 in coverage per beneficiary, as long as the account’s deposits are eligible for protection, she said. The maximum per account is five beneficiaries, or $1.25 million. This applies to revocable or irrevocable trust or custodial accounts, she noted.
Online tools can help you assess your FDIC and NCUA coverage.
Who needs to worry now
The bigger concern people should worry about is what financially may happen as time goes on, Orman said.
“For those people who don’t have any savings at all, they now really, really need to be worried,” Orman said.
We are now living in a “very, very, very precarious time — almost more precarious than the pandemic,” she said.
As expenses have gone up, people’s savings have diminished. Meanwhile, people have taken on more debt, and there are signs that some lenders are starting to tighten standards.
But today’s banking woes are “very, very different than 2008,” Orman said.
“In 2008, you had all those loans that nobody knew how to value,” she said.
Today, most people have their money insured.
“So individuals with money in a bank or credit union, I would not be afraid,” Orman said.
But you do need to remember the only person who can save you is you, she said.
That goes for when it comes to making sure your money is safe and sound, that you are saving for emergencies, that you are investing for retirement, that you are getting out of debt, that you are living below your means and that you are getting more pleasure from saving than spending.
“Who is going to do that for you? Nobody but you,” Orman said.