Why emergency savings funds can be frustrating for some people.
What are the good and bad points of an emergency savings fund? How can you spare the money if you are living paycheck-to-paycheck?
Here is my take on the popular emergency fund, a trendy savings goal that can be super frustrating to people who are living on a low income.
Although it is never a bad idea to have a savings, some of the do-or-die advice out there can you leave you feeling anxious about what you can really afford to save.
DO I Need an Emergency Savings Fund?
You have to have an emergency fund. Everyone says so. It is probably the most shared piece of personal finance advice (right after live below your means and buy second-hand).
And it is so easy, too, so they say.
That's right, the solution to any financial disaster that could possibly happen to you is that emergency savings fund.
All you have to do is fill it with 3-12 months of living expenses PLUS an extra amount for actual unexpected emergencies, such as medical issues, broken cars, dead water heaters, etc.
What are you waiting for? Chunk in $50,000 right now.
Oh wait. Don't have that much spare change? Yeah...that is one of the many reasons that an emergency fund can be a huge problem for some people.
This week, I chatted with a few real life acquaintances about emergency funds (and savings in general. Just to see how well this concept fit your everyday, not-upper-middle-class person.
This is what I learned:
The Good Part About an Emergency Savings Fund
There is no doubt that having an emergency fund is a GOOD idea. I mean, is having thousands of dollars in the bank ever a bad idea?
Almost everyone agreed that they would feel a lot better if they had at least six months worth of expenses in the bank.
That includes enough money to cover unexpected emergencies, such as a medical bill, a co-pay, a car repair, a home repair, new shoes for their kids, etc.
When did the average person (here) think they would be most likely to use this fund? During a time of unemployment.
A few people cited that they would use it to cover the above emergencies even if they were employed, if the cost of the emergency was more than they could spare from their normal budget.
But most people were more worried about having something come up when they were out of work and helpless to cover the cost.
(Yeah, I can totally relate.)
Yes. An emergency savings fund is the way to go. But, just because someone making $100K+ a year says it is easy to implement, doesn't mean someone with a $20,000 annual salary can manage it painlessly. That brings us to the bad...
The Bad Part About an Emergency Fund
The bad part about emergency savings funds is that they are touted as being not only easy and fast to build up, but also your number one priority.
If you read some online financial advice, it might say you can just get rid of cable for a few months, or just eat beans and rice, to make it happen.
If you have expenses you can pare down, then yes, you can save easily and quickly (if you are disciplined). But what if you can't? I know plenty of people who work long, hard hours, and if they bring home $35,000 a year, they are considered well-off for the region.
That is, they are well-off as far as making a little more than the average person. However, the expenses of housing, childcare, and utilities eat that away pretty quickly. Not to mention insurance, medical expenses, groceries, etc.
If they have any debt or loans, then its pretty much curtains as far as a savings account, no matter how "low-frills" they keep their expenses.
There is very little advice on how to build an emergency fund when you have very few extra pennies per month.
An emergency fund may also build up a false sense of security. (boy, can it.) You crunch some numbers, come up with an amount for your fund that will cover several months of living expenses.
You tweak it so you can afford monthly deposits, and watch it grow.
Then when something BIG happens, (like unemployment, illness, a major disaster) you think that it is all cool. And it can be. Unless lots of other stuff happens.
I'm saying that from experience. We thought we had a pretty nice amount set back, but so far, we've had at least a dozen expenses appear out of nowhere at the same time. Without an income, that meant not being able to recover each amount that had to be spent...
Another question people had was...
"How can I maintain the balance?"
The Nearly Impossible
One of the common ways to build up a savings account is by adding "extra money". This could mean tax returns, gifts, prizes, or money earned from side-jobs.
Although it is easy enough to deposit these chunks, it can be a lot harder to maintain the balance if your income doesn't always cover your expenses. I mean, the whole point of the emergency fund was that you couldn't afford those emergencies from your spare change, right?
Let's say your hours are cut at work. Suddenly, your paycheck might only just cover expenses. (no frills.) Now say your car blows up, or your kid breaks an arm and your insurance doesn't cover all the costs.
You have to dip into the emergency fund even though you are working. But there isn't any way to put it back. Or even if you do scrimp and save to put some in there, it replenishes slowly, leaving you vulnerable to the next financial problem comes along.
The false sense of security here is that many personal finance blogs write like only one bad thing can happen to you while you are depending on your savings.
Many people get caught in this cycle, and watching that balance dip can be scary...especially if less hours at work might mean an impending lay-off. Every dollar you spend is a little less time you have if something really bad happens.
A few small emergencies come along on top of your big ones, and you are left with nothing again.
So what can you do, if you, like so many Americans, live below poverty level or paycheck-to-paycheck?
Here are my tips:
To Sum It Up
If you don't have a healthy, steady income coming in, then building an emergency fund is not easy. Maintaining an emergency fund can be nearly impossible if bad stuff starts to happen and you don't have time to recover between episodes.
It's not that emergency funds are bad. It's just that they have a reputation as being a cure-all. And when people think they have a cure-all, they don't always stop to take extra precautions. (Kinda like getting a flu shot and then thinking you don't need to wash your hands.)
For the most part, people telling you to stash back $1000 for a rainy day are only foreseeing one emergency happening at a time, and figure this will keep you from having to dip into your regular savings or monthly budget.
While that might be true for say, repairing that car, it is NOT true of being unemployed. You can't be sure you will replace your job within the time limit set by your emergency fund (no matter how big it is!) And even when most people do, they are still back to "square one" so to speak, as far as building again, and paying off debts.
And $1000 does not go very far at all. Again, we innoculate ourselves with a thousand dollars and think that will fix everything. (Even if we don't have any other savings or resources.)
So what you can you do to make it better? Without having to spend more money to move or go back to college or whatever crazy, time-consuming and expensive advice someone hands you?
10 Tips That Can Help a Little (But Not as Much as We Would All Like)
Please note that I am NOT a financial adviser. But I have been really poor. And you know what they say about experience being more valuable than a degree sometimes, right?
Personally, I don't suggest that anyone just pack up and move to a land of milk and honey, where money floats down rivers of rainbow pee.
Because for a huge percentage of people, that is just not practical. Just because one person lives in a certain place and makes $200,000 a year, doesn't mean anyone can, or that someone with only $1000 dollars in their savings can afford to move at all.
So lets assume that you are staying where you are, in your own pasture, and not gambling on the chance that the grass is greener in Seattle or New York or wherever. Here are ten things you can do right now to start making things financially better:
1. Build ONE savings account.
If you are struggling and living on as little as possible, don't split what you have between multiple accounts. If it comes down to being homeless today because of an unexpected emergency, then an accessible fund is a bigger priority than a secondary retirement account, a gift account, a Disneyland fund, etc.
This doesn't give you more money, but you know how much you have, and can access it quickly if and when it is needed.
2. Ask For Work
If you have just one single skill that you could sell, try to sell it. Even if that means going door-to-door and offering to shave people's dogs cheaper than a groomer.
If you can just do that one day a week, you might be able to add $100 or more to your account per week.
Here are some ideas for finding a side hustle even if you live in a rural area.
3. Negotiate on Debts. Cry if You Have To
If you have some really big bills coming in (especially medical bills) and you just don't have the extra to put towards them...
Fight it out. Keep trying. Build up all that stress and frustration you are feeling and bawl. You aren't trying to get out of paying a fee. You are trying to get your monthly payments lowered so you can actually afford them.
4. Accept Help
You don't have to ask for loans. But if someone offers to help, accept it graciously.
Even better? Tell them you would like groceries or diapers or a gas card instead of cash. Then they know for sure that you are spending it on a necessity.
Most importantly...if someone DOES give you money, or a gift card, put that money into a fund to be used for necessities. That is not Netflix money.
5. Don't Eat Just Beans and Rice.
Seriously. Its not a balanced meal. And if you get burned out, you are going to be so tempted to binge one day. Also, beans and rice are not diabetic friendly in mass quantities, so do consider that a varied diet could prevent really costly healthcare issues down the road.
I've been there. I've done that. And after awhile, it just makes life not worth living.
6. Don't "Eat" ANY Fees for Convenience
For example, we have one utility company that will only take money orders. It is a big hassle to buy them at the bank rather than other places around town.
But the bank is cheaper (by $0.32). Thirty-two cents is thirty-two cents. Just like $1 at the ATM is $1. Don't get cash out when you swipe your debit card at the grocery store either. That's another fee.
7. Don't Use Automated Bill Pay
Whoa. I know that will make some people irate. But really, it depends on your circumstances. We have three bills that have a little flexibility built into them. (One of the great things about small local companies).
By manually paying our bills, we can pay when the money is in the bank, and not risk an overdraft. Not all bills come due on the exact same day of the month.
8. Don't Keep Large Amounts of Cash At Home
Large being anything over what you need on your person for the week. If your money is at home and not in the bank, what happens if there is a fire, or a natural disaster?
Think it doesn't happen? All of my childhood and teen savings were destroyed when my family's home burned to the ground. (We lived almost 42 miles from a bank, I thought I was being practical.)
It can also be stolen.
I don't care where you keep it--in the bank, buried in the back yard--but think about what would happen if it was suddenly gone.
Also, money in the bank earns. It might not be much, but it's yours if you use it.
9. Don't Give Money Away
I see lots of people who are struggling to make ends meet, barely able to afford meager meals and keep their electricity on. Yet they are giving 10% or more to churches or charities weekly.
I understand why they feel this is important, and I am absolutely NOT saying you shouldn't be charitable. I give to charity too even when I am broke. (My spending money, not our bill money.)
But please see that your family is cared for first, then obligations to others (such as loans you may owe to other people) before giving.
At the very least, give an amount that you can afford without harming your children or family, and volunteer more time instead.
That also means not giving away money readily to people who ask to borrow. Its hard, but sometimes you have to do what you have to do. Even if you feel like a hypocrite at times.
You can definitely make up for this ten fold once you get back on your feet, and there should be lots of acceptable ways to give back to your community that aren't monetary.
10. Do What You Have to Do
As long as it is legal, that is. If that means selling an heirloom, or staying at home for two weeks at a stretch, then do it. If that means homeschooling so that you can save money on school expenses, consider it.
Sometimes you have to make hard decisions. You might have to sell your wedding ring, or rehome your beloved pet. You might have to take jobs that are horrible and underpaid.
And no. Its not fair. Especially to people who have tried to do their best and crap keeps happening that they can't control.
But the best thing you can do for yourself is to NOT listen to some of the financial advice you see online. Don't listen to people who are in different circumstances, because their scenario does not apply to you. And vice versa.
And a bonus tip for building your savings account? Put back much more than you actually need for monthly expenses. Round it up. Round that sum up as much as you can possibly afford. If you can squeeze out an extra $5 per week, squeeze it hard.
Because you cannot predict the future. You can only estimate it.
Have you successfully built an emergency fund? Did it reach your goal amount? How difficult was it?