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The pandemic has proven that we are not financially prepared for times of crisis – Forbes Advisor

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As the Covid-19 pandemic swept the country, the abrupt changes in our lifestyle also rocked our financial systems. Job losses, income cuts, health problems and economic restrictions have shaken our financial bases, especially for those of us who did not enter the pandemic with the strongest financial bases.

It appears that fewer of us are prepared for the monetary ramifications of the pandemic than we might have hoped. Without government intervention during the worst days of the Covid-19 crisis, many Americans would not have had the cash trail to cover their basic expenses for more than a few weeks.

Nearly 40% of people who had emergency savings before March 2020 drew on those funds during the pandemic, according to a survey conducted by YouGov for Forbes Advisor. Of those who used their emergency funds during the pandemic, 73.3% of those surveyed spent half or more of their savings.

The survey at the end of April 2021 asked nearly 3,700 adults about their emergency savings before and during the pandemic.

The survey illustrates the delicate house of cards on which many of us have built our financial lives. And with some pandemic assistance programs, like increased unemployment benefits and a nationwide moratorium on evictions, soon to expire, the rebuilding process can be long and difficult for some.

Old Emergency Fund tips don’t work for many Americans

Personal finance advice often marries having three to six months of expenses hidden in an emergency fund, never to be touched unless the worst case scenario occurs: job loss, illness, accident.

But just because this old maxim exists doesn’t make it easy to follow.

“You are saving for something that may or may not happen,” says Steve Pilloff, professor of finance in the School of Business at George Mason University. “And if [an emergency] happens, it’s a negative thing that you don’t actually want to happen.

With so many competing priorities for your money already – paying bills, saving for retirement, saving for school, or paying off loans – it can be difficult to set aside savings for unwanted strangers, says Lindsay Bryan-Podvin, one based in Michigan. financial therapist and author of “The Financial Anxiety Solution”.

It’s even harder if you only have $ 500 or $ 1,000 in the bank to start with, says Bryan-Podvin. Knowing that you should have 10 or 12 times the amount saved, earmarked for some unforeseen time in the future, “may seem too out of reach,” she says.

Before the pandemic, the most common amount Americans saved for emergencies was one to three months (31.6%) of spending, according to our survey. Twenty percent of respondents saved three to six months of spending.

Higher household incomes do not necessarily guarantee higher amounts saved for emergencies.

Thirty-five percent of people with household incomes of less than $ 40,000 a year said they saved one to three months of spending when the pandemic started. Thirty-seven percent of people with household incomes between $ 40,000 and $ 80,000 and 27% of those with more than $ 80,000 said the same thing.

Twenty-one percent of each income group said they started the pandemic with three to six months of spending.

This means that large amounts of people have finally been blinded by the long-term unemployment that the pandemic has imposed on many industries. Or they weren’t prepared for the loss of income they would suffer by leaving the workforce to care for family members.

The labor market collapsed so sharply that in the spring of 2020, only about half of Americans of working age had a job. This rate has yet to rebound to pre-pandemic levels.

People with higher household incomes were more likely to have a larger emergency fund with more than six months of expenses. Low-income respondents were more likely to have saved less than a month in emergency expenses. But beyond the outliers, most respondents fell into the same general distribution of savings: a majority had no more than six months of spending in reserve in the event of a financial emergency.

The pandemic has revealed how unprepared Americans must withstand financial hardship beyond short-term job loss. A overwhelming majority of households used the first stimulus check last spring to pay for rent, utilities, food or other essentials, according to a US Census Bureau survey.

Without three rounds of stimulus checks and welfare programs like increased unemployment and food stamps, many families would have had few options out of their way. And that help has still not been enough for some to close the financial gaps that have opened up during the pandemic. In May 2021, one in five tenants with children at home had yet to catch up on their rent payments, the Census Bureau found.

The pandemic has dealt a major blow to financial stability and savings

Americans don’t exactly have a glowing reputation for being able to plan for emergencies.

You’ve probably heard a version of the statistic that few Americans could cover a $ 400 emergency expense with cash.

But this investigation, the Federal Reserve Survey of Household Economics and Decision Making (SHED), does not measure how few people could cover an emergency with cash or its equivalent, such as savings or a credit card paid off immediately.

It measures how many people would choose to do this over other options like borrowing from a friend or paying credit card charges over time.

This hypothetical $ 400 gives us a rough estimate of how comfortable people are with their ability to have money when they need it.

By the end of 2020, 64% of American adults would cover an emergency expense in cash or its equivalent, according to SHED. This is a notable increase since 2013 – the end of the recovery from the Great Recession – when only half of adults would.

The comfort of Americans to cover an emergency expense has increased even in a period when nearly 25% of adults said they were worse off financially than the previous year, and more than a quarter of those surveyed said they had difficulty paying their bills.

But better covering emergency expenses doesn’t mean it’s easy to build that nest egg. And building or rebuilding a financial buffer will likely be more difficult in our post-pandemic economy, after more than a year of setbacks.

A Pew Research Center Report on finances a year after the start of the pandemic found that 31% of adults who were generally able to save money were saving less than usual during the pandemic.

Low-income working adults were more likely to say the pandemic would make it harder to meet their goals: 58% said it would be harder and 25% said it would be much harder.

“Before the pandemic, for many people [emergencies] could have been hypothetical, ”says Pilloff. “Now it has become a lot more tangible.”

As we emerge from the pandemic, many people want to be better prepared for the unknown. Forty-seven percent of people who had no emergency savings before the pandemic said they plan to build up their savings.

But even after the pandemic devastated the finances of so many Americans, there is still no clear consensus on how much we should have saved in an emergency.

About 21% of those surveyed in our survey said one to three months of spending is the most convenient, while about 30% said four to six months is the most convenient. Almost 14% said a year is the most practical amount.

The only point of agreement seems to be that something saved is better than nothing at all.

How to overcome the obstacles to building emergency economies

A few tips can help you focus on building your emergency savings, whether you’re starting from scratch or not.

Think about emergency scenarios

When trying to save money, it can be helpful to visualize what you are saving for; Naming a savings account “new car” or “summer vacation 2022” can motivate you to save.

But when you’re saving for unforeseen emergencies, it’s harder to actually think about what you’re saving for and how you’re going to do it.

Bryan-Podvin recommends taking into account any emergencies you might encounter and creating guidelines or rules for events that warrant tapping into your savings account. She says most people don’t think about how they’ll use their emergency savings until they’ve already started.

Focus on building a minimalist emergency budget

Bryan-Podvin also says to keep in mind that your emergency savings should factor in necessary living expenses, not how you normally spend. “In a real state of emergency, you automatically start cutting back on extra dinners and travel, and you’re limited to a survival budget. Don’t try to replace your income to begin with, ”she says.

Thinking about those potential scenarios that might require you to turn to your emergency funds can make the savings in that jar more tangible. Things like the size of your family, the stability of your career, or your lifestyle could influence the size of your emergency savings goal, rather than going by default to a certain number of months towards which ancient wisdom would tell you.

Beyond that, your savings plan largely depends on your financial stability and whether you are already saving.

If you don’t save for emergencies

Focus on developing a saving habit

When you start saving for emergencies, focus on creating a habit rather than how much you “should” be saving.

Building a habit can help jumpstart your savings spirit, no matter how much money you put aside. A study of users of the Acorns investment app found that people who choose to save a small amount each day saved more overall than people who saved a certain amount each week or month (say, $ 5 per day vs. $ 35 per week).

Start with your budget

“Set a real budget and make the savings part of the budget,” says Pilloff. “It might be small, but find a way, even if it’s just a few dollars, to develop this habit.”

By developing a saving habit now, it will be easier to increase your savings rate when your financial situation improves, he says.

Make the recording automatic

Your bank probably allows you to set up automatic transfers from check to savings. Once you’ve figured out your budget and what you can realistically save, set up transfers to make saving automatic and painless, even if it’s just a few dollars a week.

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