Fall 2011 | Volume 109 | Number 661

Money Matters

Safety Cushion

Could you come up with $2,000 in cash if you needed it?
by Joe Bousquin

Illustration Credit: Stephane Jorisch

If your car's transmission quit tomorrow, would you be able to come up with $2,000 cash to fix it?

If you're like half of all Americans, you probably answered no. That's also the conclusion of the National Bureau of Economic Research, a Washington, D.C.-based organization that looked at whether Americans can cope with a financial emergency.

"We found widespread financial weakness in America, with almost half of all households reporting that they could not come up with funds to deal with an ordinary financial shock," wrote study authors Annamaria Lusardi, Daniel Schneider and Peter Tufano.

This isn't a problem just for people making low salaries. Of those earning between $100,000 and $150,000 annually, nearly a quarter (24%) said they wouldn't be able to come up with $2,000 cash in 30 days to cope with a financial crisis.

"If you haven't planned for it, when your 15-year-old water heater dies, it's an emergency," says Jennifer Behrens, whose team at Thrivent Financial focuses on addressing people's day-to-day personal finance needs. "But if you've been planning for that emergency all along, it's just cold water."

Of course, most of us know we should have an emergency cushion in the bank for just such an occasion. Problem is, so many other things seem to come up first. Then, there's the intimidation factor. "It can be daunting just figuring out how to get started," Behrens says.

There's also the fact that everybody's different. We asked author and money-saving guru Jean Chatzky (jeanchatzky.com) about three common scenarios that keep people from starting an emergency fund.

Savings Challenge #1

It looks like I make enough money on paper, but it never goes far enough. Why can't I save more money than I do? "The problem is, you need to know where your money is going, and right now, you don't," says Chatzky. "Start tracking your spending to the dollar, category by category. Then, go through line by line and cut out what you can. Reduce your cell phone plan and talk or text less. Go to basic cable. All the dollars you save will add up quickly."

Savings Challenge #2

I work in consulting, construction or freelancing. I never know how much I'll make in a given month. "The trick is to look at the bigger picture," Chatzky says. "Add up your last six months of earnings and then divide by six to get an average. Then, take 5% to 10% of that and put it into savings each month." Or, set up your savings account to automatically withdraw 5% of every check before you use it to pay bills or buy groceries.

Savings Challenge #3

My spouse lost his job. I don't have any money to save. "When things like this happen, you need to make a substantial change in how you're living," Chatzky says. "Take in a roommate. Ditch the car and use public transportation. By finding enough room to ‘breathe' financially first, you'll be able to start saving a little at a time."

Bump up your insurance deductible.

By increasing your homeowner's deductible, you can lower your premium and use the difference to help establish your emergency fund. Still got collision insurance on an older car? Drop it. "Don't increase your deductible too much," Chatzky cautions. "A jump from $250 to $1,000 is probably too much, but an increase to $500 may work."

Sell, sell, sell.

Most of us have tons of stuff in our homes that we don't need, so rather than donating it, sell it online or at a yard sale. "The best garage sales are smartly merchandised and priced, with like merchandise grouped together and neatly presented," Chatzky says.

Stash your cash.

Cash Momentum, a cash management system offered by Thrivent Financial Bank, offers a way for you to save money and pay your bills. Another idea is to keep your emergency fund in a different bank than your checking account. "You are less likely to transfer funds into your checking account if it is at another location," says Keith Berman, a Thrivent Financial representative in Miami.

Use your hobby.

Sell your homemade crafts on etsy.com. Tutor neighborhood kids. Develop landscaping designs for your neighbors' yards. "My caveat is that the more you actually approach it like a business, the more money you're going to make," Chatzky says.

Grow Your Savings

Find out how you can increase your financial safety cushion by visiting Thrivent.com/calculators/savings.html.

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