Tackling the Emergency Fund Challenge
The Sad Truth
Here’s the sad truth for most workers today…we are really bad at saving money. According to a Federal Reserve report1, nearly half of Americans couldn't cover a $400 emergency expense without borrowing the money or selling something. More than half of households have less than one month's worth of income in a savings account, far from the three-to-six-month emergency fund we recommend.
It’s no surprise then, that a recent survey2 of the plan participants we serve indicated that 68% experience some level of daily money stress. A troubling 23% indicated that they think about money stress often, if not constantly.
The point is that an emergency fund is absolutely essential to financial health. Without the ability to cover unforeseen expenses, it can be extremely difficult to stick to a retirement savings plan or to prevent taking on excessive credit card debt. And, without adequate savings, a sudden drop in income can be catastrophic.
Many workers think that financial emergencies won’t happen to them. It’s easy to assume that you can cover any financial emergency with income and rationalize away the need for savings, especially with a tight budget. But the kinds of unexpected expenses you might need to cover aren’t always catastrophic. There are a lot of financial situations in which having some savings can ultimately save you from going into debt.
Tackling the Challenge
Depositing money into savings is the easy part, as many take advantage of employer direct deposit or automatic savings programs from their bank. It’s leaving the cash in savings that’s the tricky part. Here's what you can do to help yourself out: Set up your emergency fund in a not-so-handy location to reduce the temptation to move money back into checking with just a few clicks of the mouse. Consider an online bank or other financial institution that does not serve as your regular bank. Work toward an initial goal of $1,000. That’s a goal that most can reach in less than a year, and yet it’s an amount that can make a huge difference when you have an emergency. Once you’ve reached that goal, reward yourself. You’ve worked hard and deserve a treat.
Then, set the goal of saving one month of net expenses and work toward that. This will be tougher. It may involve sacrifices like selling stuff, saying “no” to the kids, foregoing a vacation, or reducing holiday spending. But the peace of mind you’ll earn with a kitty of cash stashed away will be well worth it.
Recognizing an Emergency vs. a Splurge
Before tapping your fund, ask yourself if the expense is “emergency fund worthy.” Often people are tempted to spend the money on things that aren’t emergencies. They’ve built up several hundred dollars in savings and start thinking about buying a flat panel television or going on a trip – and that’s just what they do. If you want to have a savings account for big splurges, that’s great – start a “splurge fund,” too. However, it’s important to leave the emergency fund completely alone until you need it. Deposit money regularly through an automatic savings plan and don’t even look at the balance until an actual emergency occurs.
Before long, your life won’t be disrupted by these kinds of emergencies – and you’ll sleep a lot better at night knowing that.
1Federal Reserve Report on the Economic Well-Being of US Households in 2014 (May 2015)
2Survey responses received from approximately 2,198 retirement plan participants of current Francis Investment Counsel clients. Clients primarily included Wisconsin-based employers across various industries such as health care, manufacturing, and professional/technical services. Survey distributed during employer-sponsored financial education engagements throughout the 2015 calendar year. All responses were anonymous and submitted voluntarily. The information contained in this report is collected from sources believed to be reliable but is not necessarily complete and cannot be guaranteed.