Happy St. Patrick’s Day!
Emergency Funds, Rainy Day Funds, “Oh Crap” Funds.. call them what you will, the concept of having money stashed aside for the sole purpose of unexpected expenses is a key aspect of your financial health. For the longest time, our Emergency Fund was our Credit Card. This was before we got our act together, set up a small emergency Fund and knocked out our $68k in Credit Card debt. Of course, if you’ve been here before, you know these things. And for those new visitors, welcome.
So why do I rehash a topic we’ve discussed before, both here and in my book (‘We Got Outta Debt‘) ? Because it’s important, that’s why! How important?
According to a recent report by FINRA (Financial Industry Regulatory Authority), households without Emergency Funds are more than 3 times as likely to miss a mortgage payment than those with an Emergency Fund in the event of an ‘Income Shock’. (Here, ‘Income Shock’ does NOT mean “Wow, I have extra money!”). Shocks are most likely caused by job loss, unexpected health costs or other negative impacts on household income.
This report used data 28,000 respondents across all 50 states gathered during the recent Recession. This report found that minority households and those with children were more vulnerable to Income shocks. Important point, not ‘more likely to have’ an Income shock, but more vulnerable.
- Minorities were 52 percent more likely to make late mortgage payments relative to non-minorities; and
- Dependents in the household increased the likelihood of late mortgage payments by 48 percent.
While having an Emergency Fund isn’t going to prevent huge problems, it IS going to decrease the likelihood of being a damaging one. Unfortunately, an Emergency Fund is one of those items that many households simply do not think about. The lack of one is also very common in the United States.
According to one study, 132 million people are considered ‘liquid asset poor’. This means that they lack the cash savings to cover basic expenses for 3 months. So for these people, if a sudden job loss, illness of themselves or a family member occur, they do not have the cash available to help cover costs. For many of them, this can be catastrophic to their household health. Many will begin to miss payments on mortgages, car loans, credit card payments. Some will attempt to continue surviving by making necessary purchase on their credit cards, thus increasing their overall debt.
Households making less that $50,000 a year were especially hard hit by the Recession. Already struggling to make ends meet, when even minor disruptions hit these households, they were 43% more likely to miss a mortgage payment.
- Start Saving Now If you are not currently adding to your Emergency Fund, start now. A good goal it to get to where you can have 3-6 month expenses. For starters, aim lower to $500 or even $1000. It may not seem like much, but it’s going to be better than nothing!
- Get Outta Debt Use this chance to assess your current finances. Income, Debt and budgets all can be tracked and used to get a plan. Use the free Financial Resources page here http://wp.me/P2FblA-4K to get started!
- Keep focused! It may take you time to get either the Emergency Fund filled up or Outta Debt, but stay focused on the long term goals.
Reference for this story: http://www.finra.org/Newsroom/NewsReleases/2013/P221811