There are many Americans who are not saving and, for these people, even a small unexpected expense will likely cause a financial setback.
A survey of 1,000 Americans by Bankrate said nearly 60 percent of Americans would not be able to pay an unexpected emergency expense from their savings.
Forty-five percent of those surveyed said they or a family member had experienced an unexpected expense in the past 12 months. Car trouble, appliance repair or illness were the most common culprits.
So, for the 60 percent who didn’t have the cash in savings, how did they pay?
- 21 percent said they would rely on a credit card
- 20 percent said they’d cut back on other expenses
- 11 percent said they’d get the money from family or friends.
Unexpected emergency expenses could be a problem for anyone, but could be especially harmful for retirees living on a fixed income. That reinforces something financial planners have been preaching for years: an emergency savings account is something everyone should have, especially retirees.
“When I’m interviewing potential clients, somebody under 65 that’s still working, they ask how much money should I have in emergency funds?” says David Blackston at Blackston Financial Advisory Group in the Villages, Fla. “I say at a minimum, nine months of income should be set aside for emergencies. It does not need to be put in the stock market. It’s for emergencies. If you have an emergency and market is down 10 percent, they are locked into a loss. Some people call it mattress money or cold cash.”
That recommendation is different from someone who is already retired, he says. “They might not need nine months put away,” he says. “They have a pension or social security coming in. Retirees should still consider setting 3 or 4 months aside.”
Not having money “designated” for emergencies is one of the “biggest mistakes we can make,” he says. “Too many people don’t have designated money. They have it tied up, can’t get it or have it stuck in the market.”
Blackston said he recently bought a new house, and in the first three months four different appliances went out. He was lucky, though. A warranty package came with the house. Otherwise, he would have been out $15,000. That’s the reason for emergency savings.
“The air conditioner goes out, you have (unexpected) health care costs or even if you need another car, that’s what emergency money is for,” he says.
“I tell people all the time, when you get your check, Social Security or pension, this is my philosophy and it his worked. Whatever you get, ten percent goes to God, ten percent you save, and you live on 80 percent. It works. Live on 80 percent of what you take home. Pay yourself ten percent.”
Dawn-Marie Joseph, president of Estate Planning & Preservation, Inc. in Williamston, Mich., recommends that clients keep the money in a specific account, like a money market account.
“A lot of time people feel comfortable with a set dollar amount (for emergencies),” she says. “I recommend they have that one specific account. It has to be liquid and has to be there for them when they need it. A new furnace, hot water heater, new roof — those things come up. You can’t always plan. It’s liquid and you can write a check.”
Who knew in 2008 what would happen in 2008,” she says. “A lot of furnace replacements and roofs went out the window because the money wasn’t guaranteed. It’s really important.”
“It doesn’t matter on this money you are setting aside whether you are making anything,” Blackston says. “It’s earmarked emergency money. The rest of your money should be distributed in a combination of savings, insurance and investment vehicles. This ensures that you have some money exposed to market risk, and some protected from market risk. But that’s not the purpose of this. If I have an emergency I want to be able to get my hands on this much money. Get it out of your checking account and put it in your savings account. “
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