Nearly three in ten Americans have no money saved for a financial emergency, according to a recent survey by Bankrate.com. Twenty percent of people polled said they have less than three months salary saved up for an unexpected financial crisis. That leaves only 42 percent of Americans financially prepared for the proverbial rainy day.
While it seems like common sense to have money saved for a financial crisis, the biggest issue holding people back from saving more is that the majority of Americans live "pay check to pay check," says budgeting expert Steven Smith, adding that the recession and bleak jobs market has exacerbated the problem.
Smith is also the CEO of Mvelopes, a free online budgeting tool, and joins The Daily Ticker in the accompanying interview to offer his advice on how to be better prepared for emergency situations.
The ideal size for an emergency savings fund varies widely. But Smith suggests people have at least three months of "total living expenses" saved for surprise expenses that do not occur on a routine basis. Ideally, he says people should allocate 80 percent of their income for reoccurring expenditures and 20 percent for a "rainy day," or what he calls "periodic expenses."
For those looking to build savings quickly, Smith offers the following 5-step plan:
- Define "emergency" and determine how much you need to set aside
- Stop overspending by using an envelope budgeting system
- Cut back on discretionary spending (like those daily $4 dollar lattes)
- Eliminate late payments and overdraft fees
- Reallocate extra debt payments and 401K funding to emergency fund
If you're not familiar with the envelope system of budgeting, Smith says, "it's very straight forward."
First, create "envelopes" or categories for all your expenditures. Smith says there are two types of categories to think about: month-to-month expenses (including utilities, housing and food related costs) and periodic expenses (including home and auto repairs or back-to-school shopping) that you don't necessarily plan for. Second, determine how much to set aside each month for each area of spending and try not to spend more than the amount you've set aside.
Mvelopes also allows users to automatically track transactions made via electronic payment tools or sites.
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