Unexpected events, like the loss of income in your family or an illness, are some of the leading causes of bankruptcies in America. It’s not always that we’re bad at managing our credit, sometimes life just has a way of testing us financially.
A Gallup Poll found that 41% of Americans have little or no emergency fund at all. That’s 41% of our population that would suffer harsh financial hardships if and when these unexpected events come their way. With no steady income the debt piles up until it completely overwhelms them.
Perhaps what’s most alarming is the breakdown by income levels. Those that are probably in the worst situation financially are the least likely to have a nest egg of any sort. When you’re barely making enough to get by it’s difficult to build up any sort of emergency fund.
How Long Can We Last?
Losing a source of income can obviously be a devastating setback to any household. But even those with an emergency fund in place can only last for so long. With the job market the way it is now, almost 10% of Americans unemployed and another 20% underemployed, how long you can survive on your rainy day fund might mean the difference between making it through the rough times or burying yourself in debt.
More than half of those that claimed to have an emergency fund in place admitted that they would not be able to last more than six months on what they have put away. In this financial climate that might not be enough. The poll asked: “How many weeks or months do you think you could exist on your emergency fund before you would be in serious financial jeopardy?”
Are We Saving Enough?
Obviously Americans aren’t saving nearly enough to prepare for the lean financial times that are bound to happen. Statistics for bankruptcies show that the vast majority of those filing simply didn’t plan for a rainy day.
While the leading cause of bankruptcy indicates that consumers simply overextended their credit, the next 7 reasons, totaling a whopping 73% of all bankruptcy filings, were because people simply didn’t have money in reserve to pay for unseen circumstances.
Causes for Bankruptcy
• Overextended on Credit 24%
• Unexpected Expenses 19%
• Reduction of Income 19%
• Job Loss 12%
• Illness or Injury 11%
• Divorce 6%
• Birth or Adoption 3%
• Death in the Family 3%
• Retirement 2%
• Identity Theft 1%
SOURCE: BankruptcyLawFirms.com
Two of these reasons that people file for bankruptcy are because people were utterly careless: overextending their credit and not planning for retirement. The rest were just facts of life that are going to affect even the best financial planners. Not having the money put away to get over these financial humps can create a downward spiral of bad credit, mounting debt and eventually, bankruptcy.
Why it’s So Vital to Have an Emergency Fund
If the statistics above don’t frighten you, then maybe some day-to-day benefits will be more convincing. A financial emergency doesn’t always lead to credit repair or a bankruptcy, but it could hurt your finances, your credit scores and your borrowing power.
• Avoid Late Fees – Unfortunately many Americans live paycheck-to-paycheck. When an emergency hits, they’re often forced to miss credit card payments for a month or two, or maybe overdraw their bank accounts. While you may be able to recover financially, your credit score (and your borrowing power) will take a considerable hit.
• Keep Debt Low – When something unexpected happens and we need money, the first resource is usually our credit cards, or even worse a personal loan. Being able to keep your debt steadily on the decline while utilizing your emergency fund is key to not reaching you financial breaking point.
• Maintain Your Budget – As I’ve said in many blog posts, budgeting is so important if you truly want to succeed financially. Having a rainy day fund can keep your budget intact when something unexpected crosses your path. Otherwise you may find yourself scrambling to devise a new budget.
Later this week I plan on getting into the best ways to start an emergency fund and discuss what it could mean for your finances and your overall credit profile.
Related Articles:
