According to recent research, very few Americans have enough savings to cover their basic needs in case of an emergency.
Experts recommend that every family keep enough savings on hand to keep them going for four to six months in case of an emergency, such as illness, loss of a job, or another unexpected event. For families living hand-to-mouth, or paycheck-to-paycheck, building up that sort of savings seems like an insurmountable goal.
So how many Americans have the savings they need to protect themselves in case of an unexpected life event that drains your wallet and stops your paycheck from coming?
Savers and Spenders
Last year, 46 percent of Americans said they had less than three months of savings stashed away. Current statistics show that only 25 percent of Americans have six months worth of expenses saved, and an astounding 28 percent have no savings at all. Last year that number was 24 percent, based on a survey of 1000 American adults.
With the economy in recovery from recession and jobless rates slowly creeping down, many experts thought the trend would go the opposite way, with people socking away more savings as their financial pictures stabilized, but that doesn’t seem to be the case.
We asked Roman Shteyn, founder of Credit-Land.com, what he thought was behind the rising percentage of Americans with no savings.
“When the economy is weak and people are struggling to save even the smallest amount, people may see their credit card as their emergency rainy-day fund. This might seem convenient, but it’s never a good idea. People will quickly get in over their heads, and if they are unable to keep up with minimum payments, then they will be even worse off,” Shteyn cautions.
Many people live from paycheck to paycheck, and in tight economic times like these, it’s tough to build an emergency fund. No one feels like they have money to spare. When faced with not paying a bill at all, or putting it on a credit card that has room, many people will opt for the credit card payment.
How fast can consumers get into trouble using a credit card as a savings account? Considering that the average American household spent $48,000 in 2010, and the average credit card limit of typical American consumers is $19,000, within six months that card can easily be maxed out. With an average APR of 15% for most credit cards, a person using their credit card as an emergency fund will be up a creek without the proverbial paddle.
How Much is Enough?
How much money should be in an emergency fund?
“You need to look at your cash flow, and figure out the minimum you absolutely need to get by, “says Shteyn.
Sit down and figure out what your monthly expenses are. Housing, food, utilities, insurance, transportation, groceries, childcare, gifts, clothing, a night out now and then – how much does it all add up to? A good rule of thumb is to have 3-6 months of expenses socked away. So if your monthly budget equals about $5,000, it’s a good idea for the average American to have between $15,000 and $30,000 in an emergency savings fund.