Are You Broke But Don’t Know It?
If you are living paycheck-to-paycheck, you are broke. You may not realize it because regular paychecks mask the symptoms, but it is the truth. Just ask thousands of federal workers whom the government furloughed during the recent shutdown. When they did not receive that next paycheck, they could not pay all of their bills. Some could not feed their families. If missing one paycheck puts you in financial trouble, you are broke — and probably have been for some time.
What do I mean by broke? You have little or no liquid savings to back you up. You spend all of your paycheck by the end of the next pay period. If you don’t receive the next paycheck, you must borrow money or tap your retirement account, if you have one, to pay your bills.
You are not alone. In a 2017 survey by CareerBuilder, 78% of respondents characterized themselves as living paycheck-to-paycheck.
Over 50% of Americans save $100 or less a month
In that same CareerBuilder survey, 26% of respondents saved nothing monthly while an additional 31% set aside $100 or less each month.
That is the problem: little or no savings. A foundation of easily accessible savings, an emergency fund, is the key to stable and sound personal finances. Without that foundation, you are broke.
Develop the saving habit by making saving your top priority
Saving is easy if you make it a priority. Treat saving like you would a bill payment. Make it your highest priority and pay it first, or better yet, have it automatically withdrawn from your paycheck or checking account when you get paid so you never see it.
Before you say you cannot afford to set aside money for saving each month, consider this: When you wanted to purchase something that really mattered to you, didn’t you find a way to afford the monthly payment? Of course, you did. You did whatever it took to afford that monthly payment. If you are tired of counting the days before your next paycheck, if you are tired of being broke at the end of each pay period, you will find a way to start saving some money each month.
Here is a quick and timely idea to jump-start your savings: Deposit your income tax withholding refund in your emergency fund savings account.
How much should you save?
Your goal is to accumulate an adequate emergency fund. Make it a priority over any other saving, including retirement saving. What good is a retirement account if you raid it every time you need money to cover living expenses due to an interruption in income?
Most personal finance experts recommend having at least three to six months of living expenses in a savings account you can easily access such as a passbook or money market account. Three to six months is the time it normally takes to find new employment if you lose your job.
Protect your emergency fund
Once you have accumulated a month or two of living expenses, you will be tempted to spend some or all of that money. Don’t do it. Protect your emergency fund. Save it for those times when you experience a temporary interruption in income due to a reduction in hours, layoff, illness, accident, natural disaster or job loss. Resist the impulse to dip into your emergency fund to pay for insurance copays and deductibles, car or house repairs, appliance replacement, and other so-called emergencies. These are not emergencies. They are unpredictable expenses you should prepare for by setting money aside in advance as part of your monthly budget. Save for unpredictable expenses in addition to saving for the emergency fund.
Saving benefits you in two ways
Setting aside money for your emergency fund helps you replace lost income in two ways: 1. You have money in savings to pay your living expenses. 2. Saving reduces those living expenses by the amount you set aside each month. That is money you will not need to replace in the event of a temporary interruption in income.
You don’t have to live one paycheck from financial hardship. Develop the saving habit and you will soon have an adequate emergency fund, a sound foundation for your finances.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle (Double-Dome Publications, 1996). He writes about personal finance at LiveOnCash Blog where this article was first published.