Saving up for a vacation is one thing, but for a new muffler or a broken elbow? That’s no fun.
Maybe that’s why Americans just aren’t doing it. In fact, one in three American families don’t have any savings, including 10% of those who earn more than $100,000 a year, according to a survey of 7,845 people by the Pew Charitable Trusts.
A medical emergency or a job loss could push many households to the financial brink. When faced with financial shock, including car bills, home repairs or medical emergencies, 41% said they don’t have enough saved to pay a $2,000 bill.
Without a fund that they can immediately tap, half of households said they would use credit cards and more than a third would borrow money to bail themselves out. But that comes at a cost.
“You should never use your credit card for an emergency,” said Jim Chilton, CEO of the non-profit Society for Financial Awareness. Their double-digit interest rates might be a price that you can’t afford later.
Instead of panicking and turning to credit, Chilton said, you need to plan ahead. Ask yourself how much you need in your emergency fund to “sleep great at night” and get started saving.
Ideally, it’s best for a family to have both a “rainy day fund” and an “emergency fund,” said Mark Hamrick, senior economic analyst at Bankrate.com. A rainy day fund is money you might tap into more often to cover unexpected trips and medical bills. An emergency fund, however, is a more long-term proposition. It should be able to cover four to seven months of living expenses in case you can’t work for a long stretch.
But don’t be scared by the ambitious goal. If you don’t have much left after paying the bills every month, Clinton Key, research officer at the Pew Charitable Trusts, said start with baby steps. The first thing to do is pay down your credit card debt. Then start your emergency savings. Any amount you’re comfortable putting aside on a regular basis is helpful. The best way, Chilton said, is to set up an automatic draft into a separate savings account.
You can also grow your emergency fund by identifying your spending leaks. Instead of going out every weekend, Chilton said you might want to cut back to every other week. You can also save a lot by preparing your own lunch rather than “getting a quick bite.” On average, Americans spend about $20 a week on restaurant lunches, or $1,043 per year, according to a survey by Visa. Now that might give prospective savers some food for thought.
Some tips to help you build a cushion:
• Start small. Aim for just $1,000 and work your way up to a reserve to cover your expenses for several months.
• Keep it safe. A separate savings account is must. You need to build a wall between spending money and savings.
• Make it automatic. Set up a monthly transfer.
• Stash windfalls. Any unexpected money, like a tax refund or raise, should go straight to savings.