Emergency or Bump in the Road
An emergency fund is an account where you can safely hold money you may need quickly. It can help you stay on track when life hits a bump in the road.
The Federal Reserve says one common goal is to save up three months of household expenses.
More than 40% of American adults say they couldn’t cover an unexpected $400 expense without borrowing or selling something.
Your car breaks down. You slip on a patch of ice and break your wrist. The refrigerator dies (two days after you had to call a plumber for a busted pipe).
Unexpected expenses happen. And they can stress even a carefully planned budget if there's no "cushion" to fall back on.
Even those who feel they are on sound financial ground can run into trouble. A recent study by the Federal Reserve (the Fed) found 74% of surveyed adults said they were either "doing okay" or "living comfortably" in 2017. But …
The same survey found 30 percent of adults had a family income that fluctuated month to month (thanks, gig economy) and more than 40% said if faced with an unexpected $400 expense, they couldn't cover it without borrowing or selling something.
Emergency funds
The Fed reports, "Relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without savings."
Now, figure in a mortgage, a bill that needs to be paid to avoid a potential financial mess. Think about how hard you worked to get into that house, to build equity, to make it a home. Would an unexpected expense put all that in jeopardy?
An emergency fund can help. The Fed found one common method of financial preparation is to build enough savings to cover three months of expenses
The Financial Industry Regulatory Authority (FINRA) is the agency that oversees the investment industry in the United States. The FINRA Investor Education Foundation has found a glimmer of good news, noting the percentage of Americans who've set aside at least three months of living expenses in case of an emergency rose from 40 percent in 2012 to 46 percent in 2015, its latest survey.
Considering the Fed found 66 percent of Americans are homeowners, that leaves a lot of homeowners getting by without an emergency fund.
Tightrope without a net?
Are you one of those dancing a fine line between covering your bills (including your mortgage) and financial distress from a financial hiccup?
Getting an emergency fund started doesn't have to be complicated.
Smart About Money (SAM), a program from the nonprofit National Endowment for Financial Education, says don't start out with an overwhelming goal. Start small. Even $20 a month (c'mon, less than a buck a day) is a start, although SAM says $100 a month would be better.
- Set short-term and long-term goals (say $100 a month, with an eye toward accumulating six months of expenses).
- Establish a budget, know what you spend and look for ways to reduce spending.
- Automate contributions, maybe through payroll deductions or bank transfer.
- Hold on to "free money," such as a bonus or raise at work, cash gifts, etc.
FINRA suggests setting aside those savings in an easy access account such as a regular savings account at a bank or credit union. If you shop around, you'll find the interest rates paid are rising. Or, if you're a little more confident in your budgeting, you can consider a series of higher-earning certificates of deposit, timed to mature at regular intervals.
Owning a home and paying down a mortgage builds net worth and stability. Don't let a trip to the emergency room or a blown clutch put all that work at risk.
Try FINRA's Financial Literacy Quiz and find out if you're as financially savvy as you think.