The average American has a whopping $41,600 sitting in bank savings accounts, according to the most recent Survey of Consumer Finances (SCF).
This impressive factoid paints a flattering picture of personal finances in the U.S. before the pandemic. But in reality, it overshadows a more accurate depiction of most Americans’ ability to save.
A different side to the data collected by the Federal Reserve shows the median is much lower. The median, which represents the center-most number of all bank balances involved in the study, indicates the average doesn’t tell the full story. The median savings balance of just $5,300.
Now three years since the start of the pandemic, the country’s savings are on a rocky path. Another survey that polled 1,000 U.S. households found that more than half of all Americans are so savings poor they can’t cover a $1,000 unexpected expense.
What if You Don’t Have an Emergency Fund?
Without savings set aside for an emergency, you’re vulnerable to any unexpected expense you can’t anticipate. Car troubles, healthcare issues, or household repairs are frustrating for anyone who fields these issues, but they become true emergencies when you don’t have the cash on hand to take of them.
With your emergency fund sitting empty, online loans may be the only way you can handle an unexpected auto repair or a medical expense. The financial institution MoneyKey describes online loans as a means to bridge the gap between your paycheck and an urgent issue.
If approved, online loans advance you the funds you need to take care of business. But like all short-term personal loans, online loans through MoneyKey come with rates and fees you’ll have to repay on top of your borrowing amount.
That’s the cost of borrowing money online or in person, but it’s why online loans never trump savings. A solid emergency fund gives you the luxury of handling repairs on your own dime, so you can avoid the interest and finance charges that come with the average loan online.
How Much Savings Should You Have in Your Fund?
While having an average of $41,600 in your emergency fund would make life easier, it may not be realistic. Generally, you should aim to save up to three to six months of living expenses for emergencies. This amount is sizeable enough to help you with minor expenses or short-term absences from work.
Some advisors, however, recommend doubling this goal to as much as 12 months. At this size, an emergency fund gives you a safety net for more long-term issues. You’ll have a year’s worth of cash to lean on in case you’re sick in hospital or have to take time off work to look after a sick loved one.
Use a Budget to Track and Cut Expenses
Whether you’re shooting for a goal of three or 12 months, a budget is your best bet for building savings. Track your expenses to see where your cash is going every month. You may have to cut out unnecessary splurges to free up enough money for savings.
As many restrictions lift on entertainment and travel, it’s important you don’t let this non-essential spending run away with your budget. You’ll have to sacrifice these things to save more.
Find More Income
You can only cut so many expenses before you’re left with the core essentials that you can’t live without. If you’re living on such a lean budget that you still can’t save, it may be time to consider boosting your income.
Traditionally, that would involve asking for a raise or doing what you need to do to qualify for better-paying jobs. But there’s also the option of monetizing a hobby or skill to earn more money with a virtual side gig.
According to the 50/30/20 Budget, you should try to save as much as 20% of your monthly income, spread across all savings goals including retirement and an emergency fund.
While this may be a challenge, savings are important. Having the cash on hand to handle emergencies without borrowing loans online gives you greater financial free