According to a 2020 Federal Reserve study, 36% of American adults do not have enough cash to cover a $400 unexpected expense1. While the opposite 64% say they DO have enough, that still leaves around 90 million American adults unable to handle a modest money disruption in their lives. Of those who said they could not pay for a $400 emergency, the most common approach is to simply put the expense on a credit card and then carry a balance.
Planning for and paying for emergency expenses is a discussion financial planners have all the time. It makes little sense to put money into long-term savings until you have enough cash set aside for car repair costs, a new refrigerator, or a surprise medical expense, to name a few. Placing these bills onto a credit card will incur more in interest costs than most long-term investments will generate over time.
Taking stock of your monthly fixed and discretionary expenses is one of the best ways to gain a solid understanding of your money in and money out. Fixed expenses are those that are relatively unchanging, such as rent/mortgage, car payment, utilities, subscription services, etc. Variable, or discretionary costs, are items that have more elasticity in their cost, such as dining out, travel, landscaping, clothing, groceries, etc.
The way to figure out how much money you have left at the end of each month is to create a column of numbers with both sets of expenses listed and add them up. Then compare the sum total to your monthly take home pay. If you have money left over, then you could have a way to save toward your “rainy day” fund. If not, you may want to scrutinize your discretionary costs and think of ways to reduce those expenses.
Do you really need the latest $1,200 cell phone every two years, or could you hold on to your current one a little longer? One way I cut costs is to brew my own coffee. According to the Specialty Coffee Association of America, one pound of coffee is enough to brew 48 6-ounce cups. One pound of Dunkin’ Donuts coffee is $8.32, meaning one cup costs $0.17. Even if you prefer a 16-ounce size that’s about $0.50/cup, Starbucks can’t come close.
Human nature prevents us from closely tracking our spending because most of us don’t want to face the reality of our spending habits. It feels too. . .”restrictive,” and we believe we deserve the things we buy. Others may convince themselves that spending discipline is “boring” and doesn’t allow for impulse buying. However, unexpected things happen to all of us, and setting aside a portion of each paycheck into a savings account we don’t touch unless we need the money for unexpected expenses is the best way to plan ahead.
At Foster Group, truly caring for our clients means taking the time to learn what’s in their hearts and helping them pursue their goals. If you need help establishing your “rainy day” fund, give us a call. We’re always willing to help.
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This blog post is part of America Saves Week 2022; a national opportunity for organizations to work together within their communities to transform the lives of millions of Americans by encouraging them to save successfully.
Check out our other blog posts written for America Saves Week:
Save Automatically | February 21, 2022
Save for the Unexpected | February 22, 2022
Save for Retirement | February 23, 2022
Save by Reducing Debt | February 24, 2022
Save as a Family | February 25, 2022