I was stunned earlier this week to read in the Report of Economic Well-Being of U.S. Households in 2014 that 47% of Americans would experience significant financial distress – taking out debt or selling something – in order to be able to handle a $400 emergency.
The survey that the report was based on, taken in October 2014, asked 50,000 Americans what they would do in the face of an unexpected “financial disruption” that would cost $400. Think of an airline ticket, for example, or a moderate car repair.
Let’s just quote the report for the results:
“To determine individuals’ preparedness for a smaller scale financial disruption, respondents are also asked how they would pay for a hypothetical emergency expense that would cost $400. Just over half (53%) report that they could fairly easily handle such an expense, paying for it entirely using cash, money currently in their checking/savings account, or on a credit card that they would pay in full at their next statement (referred to here as “cash or its functional equivalent”). The remaining 47% indicate that such an expense would be more challenging to handle. Specifically, respondents indicate that they simply could not cover the expense (14%); would sell something (10%); or would rely on one or more means of borrowing to pay for at least part of the expense, including paying with a credit card that they pay off over time (18%), borrowing from friends or family (13%), or using a payday loan (2%).”
Basically half of Americans would find an unexpected $400 expense “challenging to handle” and would have to either borrow money or sell stuff to meet that challenge.
Think about that question in your own life. What would you do if you were hit with a $400 emergency?
It’s likely that many of you would be able to easily handle that emergency. You could pay that expense without skipping a beat. You might have to transfer some money from your savings account, or you might have enough in your checking to simply handle it.
But what about the others, those that can’t handle such an expense?
Some of them might be there out of pure poverty. They may be unemployed or unable to find enough hours to really make ends meet.
However, 14.5% of Americans are below the poverty line. That, of course, is a tragedy itself, but that also means that about a third of Americans are above the poverty line but can’t handle a $400 emergency.
This is the group of people I’m talking to. If you’re in that group – above the poverty line but unable to handle a $400 emergency – you need to make some financial changes immediately.
Cut expenses. The first thing you need to do is start chopping expenses from your life. What bills do you have that aren’t essential? Eliminate them entirely, then restore them later if you come to realize you can’t live without them. Subscribe to Netflix? Eliminate it, then bring it back if you just can’t live without it.
For your other bills, cut back on some of the optional stuff you can really live without. Subscribe to HBO? Cut it from your cable bill for now. Have a huge data plan on your cell phone? Cut it down to the level where it actually meets your real usage. Live in a posh apartment? Move to a smaller one.
For variable things, like food, just be smarter. Make a meal plan and a grocery list before you go to the store. Eat out a bit less.
Get a grip on your wasteful spending. Here’s a simple way to start. Whenever you’re about to spend money on anything, ask yourself this: Will I be glad I spent this money a week from now? Will I even remember what I spent this money on a week from now?
If the answer to either question is “no,” then you shouldn’t be spending that money, period. This has nothing to do with “being spontaneous” or “having fun.” It has to do with throwing money away on literally nothing. If you are spending money on stuff you actually won’t remember or won’t appreciate in a week’s time, then it’s the equivalent of throwing money out the window. Stop doing it.
Use that question as a litmus test over and over. About to buy a bottle of beer at the bar? Will you remember it in a week? Will you be glad you spent that $2 in a week? If not, pass. About to buy an awesome new blouse? Will you remember it in a week? Will you be glad you spent that $20 in a week? If not, pass. About to go out to a restaurant when you have food at home? Will you remember it in a week? Will you be glad you spent that $25 in a week? If not, pass.
Yes, there will be some fun expenses that you will remember and will still value in a week. Those are the ones that are truly worth it. The rest? Cut them.
Build a small emergency fund. You’re going to be spending less now, so the next step is to start channeling that extra money into something productive. You need to be prepared for those $400 expenses no matter what, so start socking money away in your savings account.
The best way to do this is automatically. Let’s say you’ve cut $50 from your bills and are finding ways to spend $50 less each month. Have your bank start automatically transferring $100 a month – or $25 a week – from your checking account to your savings account. That way, you don’t have to see it or think about it.
Four months from now, you’ll have that $400 for an emergency. I wouldn’t stop there, as a $1,000 emergency fund is a really good place to start. It takes a big emergency for you to have to tap all of that. In fact, I’d just leave that transfer going forever.
Pay down the worst debts. Another thing you need to do is start getting rid of any and all debts you have. Not only do debts come with interest rates which gobble up your money and give you nothing in return, they also require a minimum monthly payment, which eats away at your financial state no matter what. The good part is that you can get rid of those minimum monthly payments by simply paying off the debts, which is something you should assign as a top priority.
So, take all of your debts and list them by interest rate, with the highest interest rate at the top. Then, this month, make minimum payments on all of the debts, but then work hard to spend less and have some money left at the end of the month. You might even want to clean out your closet and sell some stuff that you never use when you’re in a calm state and not forced into it by an emergency.
Take that cash and make a big fat extra payment to that highest-interest debt. Knock it down big time. Do that a few times and you’ll probably see that highest-interest debt completely go away. Then start doing the same thing to the next debt on the list – the one that’s now your highest-interest debt. Keep repeating all of this until they’re all gone. It takes time, but it changes your life.
Bring down bills in a lasting way. Another key strategy is to cut your remaining bills in a way that will last by taking on one-time projects that will reduce those bills.
The big one here is your energy bill, as there are lots of one-time projects that will cut that expense. Try air sealing your home or apartment, as that will cut both your heating and cooling costs. Install LED light bulbs everywhere as your old ones burn out, replacing them one at a time (as LED bulbs are expensive initially, but eat a lot less energy and don’t need to be replaced for a LONG time).
You can cut down your water bill, too, by finding ways to use less water around the house. One way to do that is to fill a small soda bottle with water, put the cap tightly on it, and put it in your toilet tank. That reduces the amount of water used in each flush, which will add up little by little over time.
You can trim your household supplies by doing things like filling your cleaning supply bottles with homemade cleaning solutions (baking soda and/or vinegar will basically clean anything in your home).
Just find little ways to cut down on your regular expenses, especially when those little ways only involve a one-time effort or no additional effort at all.
This is a clear route to financial stability that anyone in that “in between” group can follow. If you’re above the poverty line but are unable to handle any financial emergencies, you’re walking a dangerous tightrope that puts your future solely in the hands of luck and in the hands of your boss. Break free. Get responsible. Your future self will be glad that you did so.