DebtRefinancing

Half of Americans are Financially Frail. Are You?

According to a new study by the National Bureau of Economic Research, half of Americans would not be able to stockpile $2,000 in 30 days. A quarter of Americans wouldn’t be able to save $2,000 in any amount of time, because of other expenses. 19% of Americans say they would sell or pawn off some of their personal belongings in order to pay for the emergency.

These statistics are more striking when you consider, many of those Americans are well above the poverty line. This reflects one of two things; either the person is unable to save it because they are living an expensive life and not budgeting their money properly, or they are pessimistic about their financial future (not an uncommon way of thinking these days).

Also worth considering: these statistics include the 30% the adult population which doesn’t work – students, the disabled, unemployed, and the retired population. There is no statistic yet which focuses on this group’s ability to raise $2,000 in 30 days, but odds are, it’s higher than 50%.

The Spending Cycle

Should an emergency arise, you always want some kind of backup fund. $2,000 is a decent size and can pay off many accidental incidents. The problem is, with so many people unable to save that much, what is there to do about it? You have to break the cycle of spending too much.

The problem isn’t that they can’t earn enough; it’s that they can’t save enough. Because so many Americans are paying off a debt, such as student or auto-loans or a mortgage, saving doesn’t make much sense to them. If, for example, they have an $18,000 student loan with 7.5% interest, it makes a lot more sense to put any extra into that, and save money in the long run, than it does to drop the money into a savings account earning 1% interest. But putting all your spare change into the loan, isn’t good financial planning. Always have a set amount of available funds you never drop below when paying off debt. For me, that number is $1,000, but you should assess your risk-level to need emergency funds and set your own limit accordingly.

Another Spending-Cycle contributor is credit cards. When an emergency occurs and they need to spend money they don’t have, they use a card. It’s the equivalent of paying $110 later instead of $100 now. The American mindset is, we will always make more money in the future; better to pay it off then. That is a problem, considering how difficult it is to pay off credit card debt when it gets too high.

Make a Safety Net

Rather than incurring new debt, make a safety net. It doesn’t have to be big; something is better than nothing, in any case. Put away a dollar a day, and you’ll save $2,000 in six years, plus any interest you earn on it.

If you can’t afford to save a dollar a day, I suggest you take a look at your spending and find a flaw in it. Are you throwing away food that goes bad? Are you using gas unnecessarily, or going out with friends all the time? Are you leaving electronics or lights on when they’re not in use? Is there a less-expensive brand you can buy from?

This is something you need to do. You may feel safe from a financial emergency for now, but they will happen. They always do, without fail. It’s better to be annoyed about paying for these, than it is to be frightened about not having enough.

For more tips on saving money or slashing spending that will help you build your safety net, please visit our other articles.

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