Living Paycheck to Paycheck: How About Building an Emergency Fund?

What’s the alternative to building an emergency fund? I was listening to the news the other day when a story about many Americans living paycheck to paycheck totally captured my attention. The news piece was commenting on the impacts of the government shutdown on federal employees. It referenced a Federal Reserve study called the “Report on the Economic Well-Being of U.S. Households in 2017 ” published in May 2018. The report finds that 40% of Americans, if faced with an unexpected expense of $400, would have to borrow money, sell something, or simply not be able to cover that money.  You can click here to see the news article.

40% Lack a $400 Emergency Fund

I have to say that Federal Reserve report stunned me for the dollar scale of the issue. What’s does a $400 emergency look like? Some examples are a new set of tires, a visit to urgent care with x-rays, a new water heater, or an unexpected plane trip to care for a family member. Not highly dramatic events for a household!

When I read further into the report, I found out that the 40% of Americans unable to meet this emergency $400 expenses is an improvement over five years earlier in 2013. That number was 50% in 2013. Progress at least! Nonetheless that still is a lot of people impacted. Click here to see the full report “Report on the Economic Well-Being of U.S. Households in 2017“.

Tipping Point Down the Rabbit Hole?

The report talks above people having to sell items or borrow money. While that may “take care” of the issue in the moment, it’s obviously not a great strategy. Borrowing money starts adding even further to the costs of the emergency whether it’s in the form of having to pay back a debt with interest or the potential for a strained relationship with the friend or family who loans the money. Selling items can only work as long as you have valuable things to sell. Also the price in a “crisis sale” is likely not to be the real market value.

Overall either borrowing or selling can push a person’s financial wellness even further in a negative direction down the proverbial rabbit hole. Suddenly a one time event becomes a longer term financial drain or even a crisis impacting a family’s whole trajectory.

Stepping Out: Building An Emergency Fund

The scale of the issue while trending better is still quite large. There are a multitude of issues behind that economically, culturally, and socially. Nonetheless while it’s a national issue, it doesn’t have to be our issue. How do we put in place our own an ounce of prevention? Start building an emergency fund.

If a person can put together $400 in a safe, not too easily accessible location like a bank savings account, then you have just surpassed 40% of Americans. Take your victory and enjoy it. Then gather up more courage, belief, and effort to get to $1000. You’ve surpassed another chunk of Americans. Repeat, repeat, repeat. Make it a game and see if you can put one month of expenses in your emergency fund, then two months, then three months.

Feel the relief and improved financial confidence that comes with a funded emergency fund. You begin to see that you can handle more of the unknown financial surprises that show up on occasion in our lives.

What’s a Proper Emergency Fund Size?

You can find a lot of opinions online for how much emergency fund to have. The consensus rule of thumb is 3-6 months of household expenses set aside in an emergency fund. If you are starting at $0, this appears daunting and impossible. What to do? Take it one step at a time. Directionally correct is a good thing!

Getting more technical with the amount, another important consideration is how quickly could you find a new job. The longer it takes, the more you want to bank into your emergency fund. In the situation of a possible long time between jobs, you want to push up your monthly number. Perhaps 9-12 months feels more comfortable and gives you the desired peace of mind.

Community Conversation Questions:

Please share some of your thoughts, stories, and perspectives around your experiences with emergency expenses and how you handled things. What tricks, tips, and ideas have you used to successfully build an emergency fund? Where do you keep your emergency fund so that’s accessible, but not too accessible? How has building an emergency fund impacted how you feeling around your financial health?