- It's essential to set money aside for emergencies and unplanned bills.
- Though some people are prepared, others might struggle in the event of a job layoff or emergency expense.
- Cutting discretionary spending temporarily and getting a second job can help you build up your emergency savings.
Anyone in that boat is in a pretty dire situation.
You'll often hear that building an emergency fund should trump any other financial goal you might have. But a new report by the CFPB (Consumer Financial Protection Bureau) reveals that many people are sorely lacking when it comes to emergency savings.
In its research, the CFPB posed the question: If your household lost its main source of income, about how long could you cover expenses? In response, 27% said they could cover more than six months' worth of bills, while 21% said they could cover three to six months of expenses.
But alarmingly, 21% of respondents said they'd be able to cover less than two weeks of bills in that situation. And that's a pretty scary thought.
You can't afford to go without protection
There's a reason financial experts have long urged consumers to keep enough money in their savings accounts to cover at least three full months of essential expenses. You never know when you might get hit with a giant bill out of the blue, like a home or car repair that can't be put off. Without a solid emergency fund, you might instantly land in debt to cover such an expense. And that debt could easily accumulate and cost you a lot of money in interest over time.
Furthermore, you never know when you might lose your job and struggle to find another one. The reason experts caution to keep three months' worth of bills in savings is that it can easily take that long to search for positions, apply, go on interviews, and get hired elsewhere. And during an economic slump, it could take even longer to find a job after getting laid off. So you really want to have a nice cushion in the bank in case you need to largely or even partially live off of your savings for a while.
And if you're thinking you can always just take out a personal loan in the event of a layoff to cover your bills, keep in mind that without an income, you may not qualify for one. So don't assume you won't need savings in that situation.
How to build or boost your savings
If your emergency fund needs work, there are steps you can take to boost it. For one thing, put yourself on a budget and start cutting back on expenses that aren't essential. You can't skip paying your rent or mortgage. But you can pledge to stop eating at restaurants and cook all of your meals at home until your savings account is in better shape.
At the same time, it pays to consider getting a second job to boost your cash reserves quickly. If you limit yourself to spending cuts only, it might take a really long time to build up a nice level of protection. And then, you run the risk of something happening before you've really had a chance to make nice progress on your savings efforts.
Having some money in the bank is better than having none at all. But if you're in a position where you couldn't cover two weeks of bills with the money in your savings, then it's really important to make building an emergency fund a priority -- and soon.
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