Posted by Manisha Thakor.
According to a recent survey,1 a third of Americans aged 36-51 have no money stashed away for an emergency. If your savings account is in the single digits, it’s time to start funneling your savings into two separate pots: One labeled “Retirement” and the other “Rainy Day.”
I know people on modest incomes who could easily cover six months of expenses in the event of unemployment or some other emergency. I also know people who make $1 million dollars a year who live paycheck to paycheck. A recent survey from money website Bankrate.com revealed that only 49% of people earning $75,000+ a year have an emergency fund large enough to cover six months of expenses.2
I think there are three main reasons why people don’t set up an emergency fund:
- No one told them to. The importance of saving for retirement is hammered home by politicians, financial experts on TV and by every HR presentation we’ve ever had at work. The need for emergency savings can feel like less of a priority; a lot of us save with vacations and other short-term goals in mind. Unless you’ve faced long-term job loss or, say, an expensive medical emergency, it’s easy to forget the importance of a rainy-day fund.
- They are living paycheck to paycheck. As I mentioned earlier, people across all income levels can be irresponsible or struggle with money. Those who are genuinely struggling to make ends meet would argue that they simply don’t have anything left by month’s end, except, perhaps, a bit more debt. I completely sympathize, of course, but as long as you have some kind of income, I believe there is always a way to start saving, even if it’s just $5 a week.
- They made bad financial decisions. Again, this can happen at any income level. Savings accounts are useful in emergencies because the cash can be withdrawn at a moment’s notice. However, it’s important to note that you are sacrificing growth for that level of liquidity. I know a lot of entrepreneurial types who would prefer to put all their spare cash into some kind of venture rather than an emergency fund. And while I admire this very American, enterprising spirit, there is never a good excuse for not having an emergency fund. The less averse to risk you are, the more wary you need to be about making a bad financial decision and seeing all your spare cash go up in smoke.
If any of the above resonates with you, it’s time to start building that emergency fund. Begin by syphoning off a small amount from each paycheck, even if it’s only $25 to $50. If you fall into the second category, and are only just scraping by, look at your bank statement from the previous month. Get two different colored highlighter pens and go through your monthly expenses, marking needs versus wants. Which of those wants can you sacrifice? Be brutally honest with yourself!
Next, put that syphoned-off money into an online savings account that doesn’t allow you to easily make withdrawals, and consider it every bit as untouchable as your 403(b). You can even impose your own IRS-like penalty on any non-emergency withdrawals you make, vowing to put, for example, 10% of those withdrawals into that 403(b) of yours or towards a favored charity, or into your retirement plan.
Regardless of how you choose to proceed, stop making excuses for not having an emergency fund and start building one today. You’ll be glad you did.