Importance of Emergency Fund Highlighted
The Covid-19 induced shutdown of the world economy has proven to be a painful validation of something that financial planners have been preaching for years: Every household should endeavor to build up an emergency fund. This sum, which must be held in a liquid, low-risk account (and not exposed to the whims of the financial markets), should be sufficient to cover household expenses for a period of three to six months. Obviously, difficult times call for difficult measures, and the monthly household budget used to estimate the required amount can be at an austere standard of living. Likewise, commissioned salespeople, investment bankers, and others with varying incomes and tenuous job security are usually encouraged to aim for the higher end, or even exceed the monthly coverage period.
A recent survey from the New York Federal Reserve found that about 40% of U.S. households would have difficulty absorbing an unexpected $400 expense. With that observation as a backdrop, it is not a surprise that lengthy lines are forming at charitable food pantries. Far too many Americans are living too close to “the edge of the cliff”. How close? CreditCards.com found that 59% of American credit cardholders entered the coronavirus outbreak carrying credit card debt on an ongoing basis. This equates to about 110 million U.S. adults. Ted Rossman, industry analyst at CreditCards.com noted, “What many believed was manageable credit card debt has suddenly turned into a situation of uncertainty.”
This is not just a recent occurrence brought to the forefront by the pandemic. Survey respondents reported that of the group carrying on-going monthly balances, only 38% have done so for less than a year. About 56% have done so for more than a year and 15% have maintained their credit card debt for five or more years. Seven percent couldn’t even recall how long they’ve carried the debt.
To be sure, the purpose of this writing is not to belittle those who find themselves in these circumstances. Rather, its purpose is to emphasize that households carrying an emergency fund are better prepared to weather the storm. Nobody saw this coming and nobody knows if and when things will return to “normal.” Further, no one knows what the next financial emergency will be as they often afflict households individually. Just the same, the stress levels are lower and the panic can often be avoided within the households that follow the sage financial planning advice regarding emergency funds.