Most Americans don't have $1,000 for an emergency
After the recent government shutdown left hundreds of thousands of Americans without a paycheck, federal employees and contractors were forced to dip into retirement savings, pick up extra work, file for unemployment — among other things — just to make ends meet.
Talk about a wake-up call — and I’m not talking about the inefficiencies of government, I’m talking about the fact that so many people had no money in the bank that they could rely on when faced with an unpredictable situation.
What’s worse is that the majority of Americans would be in the same boat if they missed even one paycheck.
According to a recent Bankrate survey, only 40% of Americans have enough cash to cover an unexpected $1,000 expense, like a car repair or medical bill. Instead, they would put it on a credit card, take out a personal loan, sell something or borrow the money from someone else.
Only 13% said they would reduce other expenses in order to free up the money to cover the unexpected bill.
Considering the fact that 30% of the survey’s respondents experienced (or had an immediate family member who experienced) an unexpected financial shock last year — with 36% facing a bill of $5,000 or more — this a big problem.
Simply put, Americans are relying on credit to live a lifestyle they cannot afford. In fact, credit card balances in the U.S. are at an all-time high — with Americans owing more than $1 trillion. Furthermore, more than 1 in 3 Americans said they would fear maxing out their credit card with a purchase of just $100 or more. That means people aren’t just carrying high balances, but they’re relying on plastic to finance what they otherwise couldn’t afford.
Why you need emergency savings
Emergency savings is like insurance for your financial life — it’s the absolute best defense against the unknown. Because the reality is, emergencies do happen, and unless you’re prepared for it, one unexpected bill can end up causing you trouble for years.
When you have extra cash in the bank, you can avoid having to turn to high-cost and complicated alternatives, such as:
Racking up high-interest credit card debt
Borrowing an expensive payday or other personal loan
Borrowing from retirement savings
Borrowing from family or friends
When you have emergency savings, emergencies become more like inconveniences. Paying to repair the car is annoying, but when you have cash to cover it, it doesn’t turn your entire life upside down and you aren’t forced to pick and choose between things like buying gas or paying the power bill.
How much you need to save
The best way to save for unexpected financial shocks is to have two separate emergency funds: a rainy day fund and an emergency fund.
A rainy day fund is money you might dip into every once in a while to cover an unexpected expense, like a medical bill.
An emergency fund is a bigger, longer-term savings fund. This money should be able to cover at least three to six months worth of living expenses in case you can’t work for a period of time, for whatever reason.
If you’re starting from scratch, these goals may seem impossible — but you can get there!vThe best way to approach saving is to start with baby steps and then build up from there.
How to start saving for an emergency
When you’re starting from scratch, it’s going to take some time to build a sufficient emergency savings supply. But depending on how aggressive you’re willing to get, there are ways to speed up the process.
Here are a few things you can do to kickstart your emergency savings!
The first thing you need to do is get control of your spending and keeping track is the only way to make that happen. And just to clarify, keeping track does not mean in your head — that works for no one. You need a trustworthy method to keep you accountable — whether it’s Excel, Google Sheets, a notebook, an app, whatever — you need to find a process that works for you.
With a budget in place, you can start to identify areas where you’re overspending and ways to cut costs — because as long as you continue to spend more than you make, you’ll never get ahead financially.
Make it automatic
Once you cut back on your spending and start to have some spare cash each month, it’s important to keep it in a safe place so you won’t spend it — because no matter how disciplined you are, if it’s there, it’s tempting.
Open a separate savings account for each fund: rainy day and emergency.
Then budget out how much extra money you will have each month and set up an automatic direct deposit from your paycheck to send each amount into each account. That way the money is put into savings before you have a chance to spend it.
We all have stuff sitting out the house that we either don’t need or don’t use! Selling a few things is an easy way to jumpstart your savings fund!
Make more money
Whether it’s picking up more hours at work, a part-time job or a side gig — there are tons of ways to quickly pick up some extra cash for your savings funds.