Could You Cover One Month of Expenses? Many Can't.

May 22, 2020

Before the pandemic we viewed a family financial crisis as an isolated event. Everyone has troubles. Sometimes people lose their jobs, things break, medical or household emergencies just happen. Life happens. When it does, we sometimes can fall back on savings, credit cards, friends and relatives, or work an extra shift at our gig job.

But this time was different.

The pandemic was a systemic failure that hit everyone. It wasn’t an individual event, it was a non-discriminating event that hit everyone. Nobody knew what would happen next, if they would get paid, lose their jobs, or be able to meet their bills.

While we never know exactly what an emergency will look like or when it will happen, we know two things: the possibility of an emergency always exists, and there are known ways to prepare.

Financial planners recommended that families keep three to six months spending in an emergency savings account. But few do. Even with the recent memory of the Great Recession in 2008, families failed to rebuild cash reserves during the recovery.

In 2015 the Pew Foundation warned that 55 percent of families had less than one month of liquid cash reserves on hand.

A Federal Reserve study asked families if they could meet a sudden expense of $400. The answers showed that 12 percent could not.

Of those who could, many would rely on selling something or using a credit card that they would pay off with their next paycheck. But what if that next paycheck wasn’t coming? They could do a side hustle, borrow from a relative, or in a stretch take some money out of their 401(k) retirement savings plan. Unless they couldn’t. Then what?

Hoping for a last-minute Plan B that doesn’t materialize can be scary. If you have that frightening, “I’ll never let this happen to me again” feeling, it’s time do something about it and set up an emergency saving fund.

How to start an emergency saving fund

The hardest part about building an emergency savings fund is starting. This is especially hard right now when everyone feels like they are in survival mode. Take a look around and you can probably find a few dollars that you didn’t expect to have. Did you save five bucks on that tank of last tank of gas because the gas price had gone down? Save it. Did you get an Economic Impact Payment from Washington and have a few dollars left over? Save it. Use any unexpected money to start your emergency account.

How to build your savings

Sock drawers: It sounds a little crazy but it works. Take that first few dollars and squirrel it away in a place where you will not be tempted to spend it every day. A secret stash of cash is easy to hide and easy to add to on a daily or weekly basis. Save ten dollars a week from cheaper gas, and you'll be prepared to cover that $400 emergency in less than a year.

Savings Accounts: Once the sock drawer has grown to an amount where you are not comfortable with having it in your home, move your stash to a savings account. It may not pay much interest, but it will be safe. Your bank or credit union will set up a separate account for you to keep your emergency money separate from your regular accounts. Remember: Keep feeding the sock drawer and deposit it periodically.

Certificate of Deposit (CDs): Once your savings account has a few hundred dollars you might want to look at rolling them into a term deposit. By committing your savings to a one year term or longer you can get a higher rate of interest. If you need the money sooner you can get it back, but you may have to pay a small interest penalty.

Saving Bonds: If you want to earn a slightly higher rate of interest you can buy a savings bond directly from the US Treasury. The US Treasury Savings bonds are horribly old fashioned but still a good method of savings for an emergency. You can also buy the I Series of Savings Bonds, which protect your savings from inflation.

Achieving financial resilience

Taking these steps enables you to build an emergency saving fund. Hopefully you will never need it, but if life happens, or, as we have seen over the past few months, something big happens, you will be prepared. You will have financial resilience and will not be knocked down by the first blow.

Having the financial security of emergency funds gives you choices on how to act. In uncertain times, having this kind of flexibility is extremely valuable.