I didn’t know how long my ‘blogging break’ would last, but with so much going on in the world — debt ceiling squabbles, credit downgrads and stock market turmoil — just to name a few, it’s nearly impossible to remain silent. The final straw was an article I read in the Chicago Tribune. The article states that according to a study by the National Foundation for Credit Counseling (NFCC), a majority (64%) of Americans don’t have $1,000 in emergency funds.
This is one of those disturbing facts that just ‘makes me wanna holla and throw up both my hands’ (in the immortal words of Marvin). When will we learn? The $1,000 figure is significant because often, it’s the little emergencies (or a string of them) that derail us — not the big ones. If we were to resolve to stash just $1,000 in a safe place, many personal financial crises could be averted.
On the other hand, our saving habits aren’t as bad as the Chicago Tribune article would have us believe. As I mentioned once before, Americans tend to save more when times are bad and spend more when times are good. The Federal Reserve tries to incentivize us to adjust our spending and saving habits according to what’s good for the economy. They try to keep interest rates low when times are bad to encourage us to spend and raise them when rates are high to encourage us to save (and avoid hyperinflation). However, consumer confidence tends to drive our spending and saving habits more than any action by government or the central banking authority. That is, if we don’t genuinely feel good about the economy, our government and where we are heading, we don’t spend as much. Instead, we sock money away for a rainy day. If you don’t believe me, take another look at the Personal Savings Rate in the United States.
The personal savings rate is the fraction of personal income that is not consumed. It has been on the rise since falling pitifully into the 2-3% range in 2007. However, even June’s 5.4% rate is lackluster. Is saving 5.4% of your income really enough to accumulate wealth? Let’s illustrate:
The personal savings rate is calculated as:
(Disposable Personal Income -Taxes – Expenditures = Savings) / Disposable Personal Income
Therefore, a person earning $40,000 in disposable income per year paying 28% in taxes with a personal savings rate of 5.4% spends 92.5% of their net income and saves $2,160 per year. This is approximately the average saving and spending scenario in the United States today. Still, the majority of Americans could not immediately put their hands on $1,000 in a pinch. This is because much of this savings is in retirement funds as indicated by the statistic from an earlier NFCC study that found that 30% of Americans have $0 dollars in non-retirement savings/investment accounts. Nothing! Nada! Zilch! Zippo! This also means that that $2,160 that folks are saving is probably the 5% of income they need to stash into their corporate retirement plan in order to get the company match. What do they do when their car breaks down unexpectedly?
Come on, folks! Let’s get it together. I speak frequently about developing short-term, medium-term and long-term goals. If you are a part of that 64% that doesn’t have $1,000, make a short-term goal to make that happen. Short-term means by this time next year, I want you to become a new statistic. Become one of the ‘haves’ instead of one of the ‘have nots’. Even with the paltry interest rates the Fed has pledged for the next two years, you can achieve this goal with less than $20 per week. Surely, you can find $20, right?