Many recent articles and surveys have illustrated how many American are basically living paycheck-to-paycheck, with no significant savings cushion:
- Most Americans can’t afford a $1,000 emergency expense – “A majority, or 64%, of Americans don’t have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling.”
- Many don’t have $2,000 for a rainy day – “A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch.”
- CareerBuilder.com Survey – “Forty-two percent of workers in the survey of more than 5,200 workers say they usually or always live paycheck to paycheck”
Along the same lines, a reader introduced me to an interactive poverty “game” called Spent, in which you try to make it through one month as an unemployed worker looking for a job and housing with their last $1,000. Try it out, and you’ll have to make some touch choices.
In just one month, I managed to get sick, need dental work, receive an undeserved traffic ticket, my best friend gets married and I can’t go, my mom needs money for medicine, my landlord raises the rent illegally, and my child refuses to eat the government-subsidized lunch. Seems a bit unlikely, yes. But a combination of a streak of bad luck and lack of support is exactly how you might end up in such a scenario.
In addition to the societal issues this brings up, from an individual point-of-view, I found that this simulator shows how living close to the edge is often significantly more expensive than someone with a cash cushion. Being poor can cost more than being rich. Consider the following:
- If you don’t have enough money for a security deposit, you’ll have a hard time renting an affordable apartment. Many renters are thus forced into long-term motels that actually charge more on a monthly basis.
- If you can’t afford a car repair, you can’t make it to work and face the prospect of losing your job.
- If you don’t pay for preventative medicine, you can end up needing more expensive treatment later.
- If you have a low balance on your bank account and overdraft by just $10, you’ll get hit with a $35 overdraft charge.
- If you just don’t pay the bill, you’ll get a late fee charge.
- If you don’t pay the bill for consecutive months, you’ll get your gas/electricity service shut off and be subject to an additional $250 deposit to get it back on.
- If you charge any of this on a credit card and don’t pay off the balance each month, you’ll owe 15-25% interest. That’s if you have the credit history to get a credit card. If you go with a payday loan instead, you’ll owe more than 100% annualized interest.
For this reason, one of the first financial steps a person should take is to save up a cash cushion. That emergency fund can easily save you more money than a 20% increase in the stock market. I would tell my own child to forget saving for retirement until you have a least a couple months of expenses saved up. Luxuries like smartphones, alcohol, cable TV, and dining out should be off-limits until then as well.
One should expect “unexpected” expenses. Even though I have a relatively high income, I place great value on my emergency fund.