Fewer Americans Than Ever Before Could Cover a $2,000 Expense
Americans are in a precarious position when it comes to emergency savings.
If you had to come up with $2,000 to cover an unexpected expense, would you be able to do it? If your answer is no, you're definitely not alone. Millions of your fellow Americans would be hard-pressed to find the funds, too.
In fact, according to the Federal Reserve, the number of people who would be able to access $2,000 for surprise bills declined dramatically this year. This is worrying as almost a third of Americans may need to do so.
Finding $2,000 to cover unexpected costs would be a major challenge for millions
The Federal Reserve's survey looks at consumers' expectations and access to credit every four months. It found the probability someone would be able to cover an unexpected $2,000 expense had fallen to just 65.6% as of October 2020. This is a series low, and it's a big drop from 69.8% in 2019.
The coronavirus pandemic has, unfortunately, caused a sharp drop in the number of people able to find the money for such a large unexpected expense. In fact, the probability someone would be able to come up with $2,000 was 69.4% at the beginning of 2020, but the numbers fell from February onwards.
Sadly, the fact that so many people likely couldn't find the funds they need for $2,000 worth of surprise costs is a big problem. Many Americans will inevitably face a situation where they need to do so. In fact, The Federal Reserve put the average chance of needing to come up with this much money over a one-month period at 31.8% in 2020.
How to make sure you're prepared to cover a large surprise bill
The likelihood of needing $2,000 to pay for surprise bills is far too high for you to be unprepared. You need to plan in advance so you're ready when these unexpected expenses come your way. The best way to do that is to save up an emergency fund in a high-yield savings account.
Ideally, the goal should be to set aside enough money in liquid savings that you could cover three to six months of living expenses. Amassing such a large fund is going to take time and effort, but you can start smaller -- try to save at least $2,000.
It's a good idea to rework your budget and drop all non-essential spending until you've saved at least that much. Once you've got your starter emergency fund, you can add to it over time.
What to do if you're faced with a large surprise bill before you have an emergency fund
Unfortunately, you may face an emergency before you've saved enough to cover it. In which case, it's too late to start building an emergency fund and you'll have to find a way to cope with the immediate situation.
If you're able, try to avoid borrowing and see if you can raise the funds from another source. This could be harder to do safely during the pandemic. But perhaps you could sell some non-essential possessions you don't use anymore or pick up some extra work on the side.
If borrowing is your only option, explore the possibility of using a 0% APR credit card. These cards -- which offer an introductory rate that allows you to avoid interest for a limited period -- could buy you the time to pay off your surprise expense without owing interest.
If you can't qualify for a 0% interest card, you can also consider a personal loan or borrowing from friends or family. Do your best to avoid payday loans or other debt with extremely high rates. Taking out these types of loans can make it really hard to get back on your feet financially once the emergency passes.
After you've dealt with the immediate expense, rework your budget to make a plan to repay any debt you've taken on and build an emergency fund. That way you can avoid a similar situation in the future.
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