Americans need to reconsider emergency fund advice as inflation rises


With inflation at its highest level in 40 years, your emergency fund has just been elevated to “state” status. It has always been the case that you need a rainy day fund, because it is not a question of whose you want a financial emergency, however when. For millions of Americans, that when is now.

Inflation rose to 9.1 percent in June, according to the latest consumer price index report released by the Bureau of Labor Statistics. It was the largest increase in 12 months since the period ending in November 1981. Gas, housing and food costs were the biggest contributors to the rise in consumer prices.

As with any economic downturn, the more affluent can complain, but they can still cope with rising prices without any significant pain. Many other Americans will experience financial discomfort (some will suffer more distress than others) and will establish new austerity measures, such as cutting back on streaming services, eating less out, or canceling vacation plans. And then there are the less fortunate who are already struggling. They will see their insecure situations get worse.

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As inflation continues to rise, Americans need to rethink how they handle their emergency savings, says Kia McCallister-Young, director of America Saves, an initiative of the Consumer Federation of America.

She gave some guidance on what people should do, whether they are having a hard time, have some savings, or have a well-funded emergency account. Many of us are still recovering from the pandemic, so gaining an understanding of where you are in these three categories is the first step in determining what you can do, ”she said in an interview.

You have no doubt heard the standard advice on aiming to save three to six months cost of living. To do this, start by adding up your monthly expenses, including everything from your rent or mortgage payments and car loans to average grocery and supply expenses. If your total monthly expenses are $ 3,000, having an emergency fund for three months will mean you save $ 9,000.

“The reality is that this can feel scary for many and impossible for some,” McCallister-Young said. Instead, America Saves recommends starting with a $ 500 target. Even a modest amount in a time of economic downturn is better than nothing.

An easy way to achieve this original goal is to save automatically by redirecting some of your directly paid payslip to a dedicated emergency savings account. Or you can have your bank make an automatic transfer for you.

Finding the money may require more cost savings or take on another job. There are many employers looking for workers. Employers added 372,000 new jobs last month, the Bureau of Labor Statistics reported.

“Private sector employment has recovered its net job loss due to the pandemic and is 140,000 higher than in February 2020,” the agency said. “In June, there was remarkable job growth in professional and business services, leisure and hospitality, and health care.”

Unemployment continued to hold at 3.6 percent in June

You did well. You managed to save a few months living costs or even reach that benchmark of six months. But rising prices have forced you to dive into your emergency fund.

If you have not already done so, make an assessment before all the savings are gone, McCallister-Young said. “Now is the time to get a clear overview of your finances,” she said. “Look at your recent income, monthly expenses and savings contributions, then adjust where you can and do what makes sense right now.”

America Saves can help you take a deep dive into your budget. The organization is holding a free virtual workshop on July 28 at. 14.00 Eastern time. You can find information about the workshop at Search for “6 Steps to Establishing a Consumption and Savings Plan.”

Take advantage of free financial coaching and counseling through America Saves, which can help you identify resources to help with your situation. “We really want people with low to moderate incomes to benefit from it because we are pairing them with someone in their communities who has access to these resources,” McCallister-Young said.

Despite rising inflation, you have more than enough in your rainy day fund. You may have saved your savings during the pandemic because you could not spend money. Or you greatly reduced your expenses because you could work from home and possibly still work remotely.

If you are in this group, you may be able to afford to increase your savings. During an economic downturn, wealth can change rapidly. If you do well, make the mistake of saving more than less. If you are a highly compensated person, you may need an emergency fund with a 12-month cost of living. If you lose your job, it can take so long to find a similar paid job.

If you are doing better than most and your savings pillow is strong, consider helping others. “These individuals are also well positioned to take these savings and invest them back into their local nonprofits, charities and organizations that provide financial aid and support to those who are feeling the major consequences of inflation,” McCallister-Young said.

She added something else during our conversation. Employers could also help their workers increase their savings, and not just with a pay rise. Companies should ask what they can do to alleviate some of the financial stress on their workers, McCallister-Young said.

“I just wanted to urge these companies that this is part of taking care of your people, and recognize that inflation is now at a record high,” she said. “Going to work every day, whether you’re taking public transportation or driving, is affecting your staff’s bottom line right now.”

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