According to a recent Bankrate survey, almost six in 10 American adults couldn't cover an unexpected expense in the $500-$1,000 range without borrowing the money or making sacrifices to their lifestyle by cutting other spending. Here's the state of Americans' emergency savings, and an action plan you could take if your savings isn't where it should be.
How Americans would cover an unexpected expense
According to the survey, which asked Americans how they would cover an unexpected expense such as a $500 car repair or a $1,000 emergency room bill, only 41% said they would be able to pay for the expense with money they have in savings. Twenty-one percent said they would use a credit card to cover the expense, and another 11% said they would most likely borrow the money from family and friends. Another 20% said they would cover the expense by reducing other spending, with cutting back on restaurant meals the most common solution.
It may be surprising to some, but younger Americans (defined by the survey as the 18-29 age group) were actually the most likely age group of all to have enough in savings to cover unexpected expenses. There could be several reasons for this -- for example, younger people tend to be less reliant on credit cards, and many this age group watched their parents lose their houses or their hard-earned savings in the Great Recession and are a little more cautious as a result.
While many people have set aside some money, the fact that nearly 60% of the population is unable to cover an emergency expense without making spending cuts or borrowing the money is an alarming statistic.
How much of an emergency fund should you have?
In my experience, the most common recommendation by experts is that you should have six months' worth of expenses set aside in a readily accessible place, such as a savings account -- not your retirement savings, investments, or home equity.
While I agree that it would be ideal for everyone to have such a cushion, six months of expenses can be a huge amount of money for some people. If your household income is $75,000, this can easily translate to $25,000 or more. Here's a quick guide I wrote in 2014 that can help you get a good idea of what six months of expenses adds up to for you and your family.
Unfortunately, saving this much just isn't a realistic goal for many people, at least in the short term. To a recent college graduate working their first job, saving a five-figure sum of money might seem like such a ridiculous target that it's not even worth trying. For this reason, I suggest an alternative approach.
Don't be discouraged -- take small steps
Instead of aiming for six months' worth of expenses in savings, start with a smaller goal. I already mentioned that nearly 60% of people couldn't handle an expense such as a $1,000 emergency room bill, so this is a good place to start. Put another way, having just $1,000 in readily accessible savings puts you in better shape to handle an emergency than 60% of American adults.
Even if you're starting with a zero balance in your savings account, you can achieve this goal by saving just $39 per week ($167 per month) for six months, which is realistic for many people. To make sure you're successful, make it automatic. Your checking account most likely has a feature that will allow you to set up a recurring transfer to your savings on a certain date -- on every payday, for example.
Now, this $1,000 figure isn't set in stone. If you feel as if you could save more money each month comfortably, go for it. The point is that while a massive emergency stockpile of cash would be nice, you can make a major impact on your financial well-being with a lot less. Then, once you hit $1,000 or whatever your initial target is, aim for a higher, but still achievable goal. You may be surprised at how quickly your reserves build up, and how much peace of mind it will give you.