Please ensure Javascript is enabled for purposes of website accessibility

62% of Americans Are Making a Major Money Mistake

By Christy Bieber - Feb 11, 2020 at 4:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are you one of them?

When it comes to managing money, there are lots of mistakes you could make that might cost you. One of the biggest is an error that, according to a survey, 62% of Americans are making: living without an emergency fund. 

Charles Schwab's 2019 Modern Wealth survey revealed the troubling fact that just 38% of Americans have money saved to cover emergencies. That means more than six in 10 of us are unprepared and unprotected for surprise expenses or a sudden loss of income. 

A woman removing money from envelope containing $100 bills.

Image source: Getty Images.

Having an emergency fund is essential 

Living life with no emergency fund is like walking a tightrope with no safety net: The slightest bump could lead to disaster. Unexpected car repairs, home repairs, or medical bills could lead you into debt that, in a worst-case scenario, could become difficult or impossible to repay.

And more major problems, such as a health issue or a job loss, could lead to true catastrophes such as repossession of your car, foreclosure, or eviction if you don't have the money to keep paying essential bills. 

Emergencies or surprise expenses are almost inevitable. While you may not face a major disaster every year, most people have something crop up that they weren't planning for. And if you have no emergency fund, you're going to have a hard time coping. 

How much should be in your emergency fund? 

Financial experts generally recommend an emergency fund that covers three to six months of living expenses. You can put this money into a high-yield savings account where it is accessible but still earns a little bit of interest.

There's a big gap between three months of living expenses and six months, so consider how precarious your situation is when deciding where you should aim. Frequent health issues or a job that isn't very secure point to the need for a larger fund; steady employment, good health, and a high-earning spouse could mean you don't need to save as much. 

If you're repaying debt, you may not be eager to devote thousands of dollars to an emergency fund. In this situation, it's a good idea to have a mini-fund so your efforts to repay debt aren't derailed by unexpected costs. The amount of your mini-fund will depend on your income and lifestyle, but likely should be somewhere between $500 and $2,000. 

How can you build up an emergency fund?

If you're one of the majority of Americans with no emergency fund, saving up so much money may seem impossible. But there are ways to do it.

One option is to make big budget cuts on a temporary basis until your fund has been built. This short-term sacrifice can give you tremendous peace of mind and potentially prevent a financial crisis. You could also find ways to earn extra income on a temporarily basis, such as working an extra job for a little while or volunteering for overtime at work. 

You could also make more-permanent changes to your household budget, cutting spending to find more cash to free up to save for your emergency fund. If living on your reduced budget works, continue that and save for other things once you're fully prepared for emergencies. 

Having an emergency fund is well worth the effort

Joining the minority of Americans with an emergency fund is an important financial goal that everyone should set. Unexpected expenses or sudden income cuts are something everyone is vulnerable to; preparing for them ensures that a temporary setback doesn't become a financial disaster that could take years to recover from. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.