60% of Americans aren't ready for a $1,000 emergency! Liquid cash. Do you have enough? Here's how to be ready for WHEN the next financial emergency hits your family.
I recently read a CNN Money article that said only 40% of American have enough money in their savings to cover a $1,000 emergency.
Another 20% of Americans surveyed said they would only be able to pay for an emergency with a credit card, which we all know would only causes more stress and debt down the road.
Yet, 33% of households reported they had an unexpected major expense in the last year. That even seems like too conservative of a number by my estimation.
_Personally, I seem to have an unexpected major expense every month. Right now, I have two cars needing repairs and a kid about to turn 16. You’ve probably been in a similar boat before. _
It’s easy to push this blame off on younger people, those in college and just starting out. Sure, young people don’t have as large of a savings account as those of us who have been working longer, but that doesn’t mean they’re the only ones who need to worry. In fact, I see people in their 50’s and 60’s make this same mistake all the time.
I met with a middle-aged couple not long ago that have more than a million in their 401K, but not enough in their liquid balances. If they had an emergency, they would have to pull from their retirement savings, which would require a fee, or take out a loan.
Even if you have $1,000 saved up, do you know how much you have available if you needed it right away? What level of emergency would you be able to cover?
The problem is that the best rates on savings accounts right now are 1.25%. If you have less than $1000 in savings, how much would that really help you?
Say you carve out $50 a month for 12 months and have $600 in your savings account by the end of the year. With your 1.25% savings account, you’d get an additional $4 that year. Woohoo…
_ How is that going to help? _
I’ve talked about this many times before but I’ll say it again.
If you don’t have money available for a potential emergency, how would putting money in your 401K help you?
That money is essentially locked away. Sure, you can take money out with interest or take out a loan but that doesn't solve your emergency fund issue.
My recommendation is that you should have 3 months of expenses in your saving account ready at any time. This is not 3 months of income or 3 months of eating ramen noodles for every meal, but 3 months of normal, everyday expenses. Very few people I meet actually have this money saved.
Then what can you do?
Part of the reason 401Ks are so successful is because they are automated by your employer. You never see that money, it is taken out of your paycheck and goes directly into your account. You can do the same thing with your savings.
Change your direct deposit settings so a small portion is put into your savings account. Don’t trust yourself to transfer it to your savings account on your own.
If it’s in your checking account, you’re probably going to spend it.
And I mean everywhere else.
If you don’t have money sitting in an emergency fund, you don’t have the right to put money in a long term savings account. Without this emergency money, you’re offsetting growth you have in other funds.
This includes your 401K, your education savings plans for your kids, paying above your credit card minimums, everything. Continuing to contribute without an emergency fund only continues to create a cycle of debt. Put everything towards building your 3 months of savings, then you have the freedom to pay extra on these secondary accounts.
You don’t have to get a second job. You don’t have to live on water and ramen noodles. You just have to find other places in your life you can save money on things you’re already spending.
A great example is car insurance. Nerd Wallet published a study that showed the average amount of savings from shopping different car insurance plans was $800 a year.People assume that if they’ve been with one insurance company for a long period of time that they’re getting the best deal possible, but that’s just not true.
In reality, it’s more like your cable bill. You’ll get a good deal up front and every year after that they start to increase what you owe.
Shop around for new insurance plans and you’ll be surprised with how much you can save.
Once you have an emergency fund built up, you have the freedom to aggressively save towards your retirement and debt, without working 80 hours a week and without continuing your credit card swiping cycle of debt and payments.
One of my favorite things to do is work with people to help them find more money in their lives without making drastic changes. It's amazing how dramatic impact doesn't always require dramatic lifestyle changes.
If you want help with your life's finances, please take the first step. Sign up for a free consultation and together we can step back to look at your overall financial situation. We’ll create a strategy to help you get traction on your savings and get you out of that cycle of debt.
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