7 Easy Ways to Build an Emergency Fund
American families are stretched thin. We all know the story: jobs are dear, debt is high and savings are low. Collectively, we're leaving a lousy legacy for our kids.
One of our biggest ongoing problems is that we're not prepared for adversity. That was the case before the recession and it's certainly true now.
More than half of adults do not have enough savings to cover three months of living expenses, according to a 2009 FINRA financial capability study. In separate research sponsored by the Financial Literacy Center, only one in four adults said they were certain they could come up with $2,000 within 30 days to pay for a major car repair, legal expense or other emergency.
Those are eye-catching stats. But this one really got me: More elderly are being pushed into personal bankruptcy by everyday expenses than by a single medical event or some other costly emergency, according to a study by two Stetson law professors.
That's a stunner because it means that people are simply not budgeting their resources; they are using credit cards and other borrowing for everyday expenses and running out the string until they have no options; and, as the study highlights, Social Security and Medicare benefits have eroded so much that they are insufficient to stop the financial downfall.
This is a theme I've written about plenty: the social safety net is threadbare. That's evident in the bankrupt public employees pension fund in Prichard, Ala. Now we see that Social Security won't cover even the meager needs of the poor elderly.
It' not enough to hope that our kids will be smarter about money, and that they will be better prepared for a world full of financial shocks with no institutional safety nets. We need to push for financial education in every classroom.
In the meantime, the Bank of Dad has to do what it can to help kids pick up some money smarts. That starts with setting a good example, which might as well begin with setting up the emergency fund that I began by talking about. Here are some sure-fire ways to start building an account with three-to-six month's worth of fixed expenses:
- Dedicate new income If you get a raise or take a second job, save the additional income. Keep up with credit card payments but don't pay them off until you have at least $500 set aside for an emergency, and keep building from there.
- Dedicate "found" money This would be any unexpected cash from an inheritance, gift or bonus. It includes the monthly savings that come when you have made the final payment on a car or furniture or finally paid off a credit card.
- Use your tax refund It's that time of year. Don't waste this opportunity.
- Trim obvious expenses Your cell plan and your cable service can almost always be cut. Ditto for the dry cleaner and eating out. Track your savings and set it aside.
- Pay yourself first Write a check to yourself every month for $100, before you pay the bills. Better yet, make it an automatic debit from your checking account.
- Save your change Use cash for purchases, never handing over anything lower then a $1 bill. You'll collect a lot of change, which if saved could amount to hundreds of dollars in a few months. If you're feeling aggressive, never use less than a $5 bill and save your singles too.
- Sell something Yard sales typically don't bring much. But everybody has something they could sell on eBay or Craigslist. For example, there is a vibrant market for used Blackberries and even the iPad now that the iPad2 has come out so quickly.
Photo courtesy Flickr user spcbrass
More on MoneyWatch:
- Do You Need It, or Just Want It?
- How to Mess Up: Mets Owner Wilpon
- How the Social Safety Net crumbled
- The Money Runs Out in Alabama
Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
