Please ensure Javascript is enabled for purposes of website accessibility

Younger Workers Are Making This Major Financial Mistake

By Maurie Backman - May 10, 2018 at 3:04PM

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

Hint: It has nothing to do with student loans.

With baby boomers retiring in rapid succession, millennials now make up the largest percentage of the workforce. And while many are gainfully employed and are on top of their bills, the majority of younger workers are making a mistake that could damage their finances irreparably: not having emergency savings. A frightening 52%, in fact, say they don't have an emergency fund, according to new data from PNC Investments. And that only means one thing: They're taking a very dangerous risk.

We all need emergency savings

Some younger workers don't have money in the bank because they're just starting out job-wise and are having trouble managing their meager paychecks. For others, however, that absent safety net boils down to misguided confidence that emergency cash just isn't necessary.

Young male adult working on a laptop


But let's be clear: No one is immune to financial emergencies. You never know when your car might break down, your company might have layoffs, or your beloved pet might need emergency surgery that costs $5,000. And if you don't have savings to tap when an unplanned expense comes your way, you'll have no choice but to resort to debt, typically of the credit card variety.

What's wrong with a little debt? Nothing, if it's truly a little and you pay it off quickly. But carrying a long-term balance can cost you tons of money in interest. And, in some cases, owing too much can damage your credit score, thereby making it more difficult (and/or expensive) for you to borrow money as needed going forward.

Therefore, if there's one goal you need to commit to this year, it's building some emergency savings. You may need to start small and work your way up, but the sooner you begin, the more protection you'll have in place.

What should your emergency fund cover?

A good emergency fund is one with enough money to cover anywhere from three to six months' worth of living expenses. This means that if you typically spend $4,000 a month on necessities, you'll want to accumulate at least $12,000 and have that sum readily available in the bank.

Where will that money come from? That's the tricky part, but if you're willing to follow a budget, you'll have an easier time eking out savings.

Creating a budget is a basic matter of listing your monthly expenses (while also factoring in one-time expenses) and comparing your total spending to the amount you bring home each month from your job. If your post-tax paychecks give you $4,000 a month to work with, but you find that you're simultaneously spending $4,000 a month, you'll need to cut some expenses. You might go big and downsize your living space to shave a few hundred dollars off your rent, or make smaller changes, like cutting back on cable and takeout, to free up that cash. The point, however, is to make sure your bills don't eat up your earnings in their entirety.

Another good way to build savings is to get a side hustle. Because that extra cash isn't money you were counting on to pay the bills, you should have no problem sticking it directly into your emergency fund once you get your hands on it.

Of course, building an emergency fund requires time and sacrifice, so you're not expected to meet your savings goal overnight. The key, however, is to recognize the need for that financial safety net and take steps that allow you to get there eventually.

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 analyst team.

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 07/05/2022.

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.