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Financial Disaster: One Emergency Away (for over half of Americans)

January 20, 2016 | Return to News & Updates

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The furnace stops working. The car brakes go out. The dog falls in a ditch and breaks a leg. These are all unexpected emergencies that could put you back $500-$1,000. Do you have a plan for this sort of financial need? According to a recent survey from Bankrate1, 63% of Americans don’t have enough savings to cover unexpected expenses up to $1,000. A study by the Federal Reserve2 last year came to a similar conclusion: 47% of Americans could not cover an emergency expense costing $400. Health emergencies are a particular concern for many. Twenty-one percent of survey respondents said they have gone without some form of medical care in the past 12 months because they could not afford it.

The importance of a savings account for emergencies cannot be underestimated. Setting aside money in a rainy-day fund is essential to protect yourself from unexpected emergencies which are almost guaranteed to occur. From major setbacks, like losing a job, to minor (but inconvenient) setbacks, like surprise taxes, few Americans are budgeting for emergencies.

How much are Americans saving?
Would you be surprised to hear that nearly half of Americans have no savings at all? When asked “How much money do you have in your savings account,” 49% said they have $0 or they don’t have a savings account at all. For those who are saving, 22% are just getting by, with less than $1,000 or just the minimum balance requirement to avoid fees. The remaining 29% are doing ok, with $1,000 or more in their savings, according to a GoBankingRates  survey3. Of course, this doesn’t account for other savings outlets, like retirement 401ks or IRAs, but the statistics there aren’t much of a consolation. The percentage of working Americans who have no retirement savings is 31%2!

How much money do americans have in their savings account

Why is saving money so hard? Well, that conversation could go a lot of different ways and include substantial student loan debt, unemployment (or underemployment), negligence, addictions. But it all boils down to one basic truth: you can only save money if you spend less than you earn. One in five survey respondents reported that they spent more than they earned in the past year2. When faced with unexpected emergencies that they couldn’t cover with savings, 23% reported they would reduce spending on other things to make the payment, 15% would resort to credit cards1. If shifting budgets around to make an emergency payment is a viable option, perhaps it would make more sense to shift budgets proactively to put money into savings. Then you wouldn’t have to live with so much worry over your head.

Set it and forget it
Instead of casual spending, paying for bills, then putting the leftover into savings (which sometimes doesn’t happen), switch those priorities around. First, pay yourself by having a set amount go directly into your savings account. If you already have a checking and savings account set up, you can do this automatically in CNB Online Banking. Second, pay your bills (You can also do this in online banking with CNBillPay). Third, evaluate what you have left and budget for spending it wisely. With an automatic payment into your savings account, that money will never show in your checking account, so you may not even notice what is missing.

So how much should you save? That answer varies between financial experts, but generally plan to save somewhere between 3-18 months of living expenses for an emergency fund. Saving at a rate of 5-15% of your paycheck, depending on your situation, is also wise.

Don’t let unexpected emergencies set you on a path for financial disaster. Pay yourself first and be prepared for whatever life throws at you.

1.  http://www.bankrate.com/finance/consumer-index/money-pulse-1215.aspx
2.  http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf
3. http://www.gobankingrates.com/savings-account/62-percent-americans-under-1000-savings-survey-finds/