Millions of workers who lost their jobs last year were hit doubly hard because they had no emergency savings to help them through the pandemic.
The percentage of Americans who said they have no emergency funds has grown to 25%, up from 21% in March 2020, according to a June Bankrate.com survey. Low-income households, which have little ability to save, were particularly hurt.
The pandemic wiped out nearly 22 million jobs nationwide, most of them in the low-wage retail, tourism and hospitality sectors.
"The pandemic has really opened many people's eyes," said Brandy Marion, Institutional Wealth education manager at BOK Financial®. "We never thought anything like this would happen. But now, it's important to learn from the experience.
"If something comes up and you don't have an emergency fund, you're going to make bad decisions," she said. "If you load up the credit card, you'll pay high interest rates. If you take money from your retirement fund, you'll pay penalties and be further from your retirement goal."
How much do you need?
While experts often suggest having six-to-nine months of expenses on hand, that may not be realistic. More than half of Americans report having less than three months of expenses saved in an emergency fund, according to the Bankrate survey.
Marion encourages workers to consider how long it typically takes to get a new job in their field. "If it typically takes you 90 days to find a new job, aim to have three to four months of savings on hand."
And make sure you're focusing your fund on emergencies, she said. It's not vacation savings.
Where to start: Reduce your debt
Marion regularly hears hard-pressed consumers say they can't save because they are struggling to pay off debt.
"If you can't repay debt, then you can't save for an emergency," Marion said.
American household debt jumped $313 billion, or 2.1%, in the second quarter, to just shy of $15 trillion, according to the Federal Reserve. That's the largest percentage increase in more than seven years.
The largest portion of that jump was due to new mortgages during the period of rising housing prices and relatively low interest rates. But credit card balances also increased by $17 billion.
Starting with debt repayment will allow you to feel more in control of your finances, but how do you make a dent? Start with achievable goals, Marion recommends, and understand it will take time to pay it off.
"I always suggest using an auto payment when possible," Marion said. "If you can't see that money, you won't miss it and you'll always make your payment on time."
Then, she recommends creating a three-year plan and asking yourself some questions:
- What's your target date for paying down the debt?
- What monthly payment do you need to get your debt to zero?
- How can you automate the process to keep yourself on track?
In addition, consider using an emergency fund calculator to determine how much to target for your savings goal.
Next Step: Budget
Once your debt repayment plan is in place, begin to build your emergency fund.
If saving several months of expenses feels overwhelming, Marion says the key is to start small. "It's like weightlifting—you're not going to start with 500 pounds, but you can start with five and build from there."
She recommends going back to the basics with a 50/30/20 budget—50% to must-haves, 20% to debt repayment (including your emergency fund) and 30% toward wants.
Put your emergency money in a separate account that you can get to but don't touch. Even starting with a $25 auto-deposit into a savings account from every paycheck, Marion says. While it doesn't seem like a lot, it adds up.
"Having an accessible account to cover the unexpected expenses just makes everything easier," Marion said. "In the end, if you're 75 and have an extra $5,000 savings account, you probably won't be upset."
If another emergency forces you to tap the money, then what? Start saving again.