Emergency savings are not only a handy convenience, they’re an absolute necessity. A shortage of funds for a family emergency or another reason can quickly escalate into a pile of bills, missed payments, and big fees and charges.
And let’s face it, there are always family emergencies. Accidents happen. People get sick. Someone gets a toothache or needs stitches. You need to prepare yourself.
The difference between a financial annoyance and a cash-shortage disruption is not much, only about $400 according to the Consumer Financial Protection Bureau (CFPB). You should have at least $400 in emergency savings to cope with common problems.
The $400 barrier
It might seem as though $400 is not a lot of money. Save $8 a week, and within a year you’ll have $400 in savings. Unfortunately, the grim reality is that a lot of people don’t have such funds.
“Relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without adequate savings,” according to the Federal Reserve. “When faced with a hypothetical expense of $400, 61% of adults in 2018 say they would cover it, using cash, savings, or a credit card paid off at the next statement.”
Translation: Millions of households simply don’t have $400 stashed away.
Title loan traps
The $400 number is important. In 2013 the CFPB reported that the typical payday loan amounted to $392. Payday loans are an enormously expensive way to get quick cash. The CFPB found that the interest rate for the typical payday borrower reached nearly 340%.
Think of that blinking dashboard warning light. It’s an irritation right now, but without a repair, the damage may get worse and the bill may be bigger.
Or imagine that you have a title loan secured by your car. The lender inserts a GPS monitor to track the vehicle as well as a starter interrupter device that turns off the car if you don’t pay your loan. Without a car, it may not be possible to get to work or keep a job. Very quickly you can be behind on a host of charges while fees mount up and your credit score nose-dives.
“A mother in Las Vegas,” said The New York Times, described “how she had been unable to get her feverish child to a hospital because her car had been shut off for a missed payment. Other borrowers have complained in interviews of being stranded, marooned in dangerous neighborhoods and cut off from their cars when they needed it the most. In Nevada, one woman testified to the Legislature that her car had been shut down on a freeway.”
How to build emergency savings
You must have the ability to deal with financial emergencies. The cheapest and best approach is to bulk up your savings.
First, establish a budget. Track how you spend your money – and what costs can be cut.
Second, build up your savings. At $8 dollars a week you really will have $400 in less than a year. But you can likely do better. Maybe have a short-term goal such as $12.50 a week. That’s roughly $50 a month or $600 a year.
Third, little savings add up. Every $50 or $100 per month counts. Like coffee? Great. Brew it at home and take it with you.
Fourth, pay bills on time and in full. You’ll avoid late fees and your credit score will rise. Use the money you save to pay down credit card debts and increase savings.
Fifth, look at the budget again. Are you sure there are not other costs that can’t be cut?
Until you have enough saved for emergencies, consider applying for a personal loan in case you need money fast.
Personal loans & family emergencies
Personal loans are another way to pay for family emergencies. A personal loan is typically an unsecured, fixed-rate loan for a specific term , usually one to five years. Interest rates range from under 6% for the most-qualified applicants to 36% for those with credit issues.
You may choose to borrow $1,000 for a 1-year term. Put it in the bank and pay it off each month. In a year, if you have no emergencies, you should have an emergency fund of $1,000. And making your personal loan payment on time may improve your credit score as well.
One of the problems with family emergencies is that they are, well, emergencies. They can pop up at any time. It may not be easy to quickly get money. You need to plan ahead.