Why You Need a Rainy Day Fund

(Photo: Maria Manco/Offset)
By Sarah Netter

In the harsh, northern Connecticut winters, a leaking oil tank is a financial nightmare that all homeowners dread.

But that’s exactly what Melanie O’Connor discovered in her basement.

“We needed to replace it ASAP, because the fear was that the slow leak would just open up,” she said, “and our basement would be flooded with 200 gallons of oil.”

The tank was replaced to the tune of nearly $2,000, which included storing the remaining oil in a holding tank while the new one was installed. It wasn’t how O’Connor and her husband wanted to spend their savings, but they didn’t have to scramble to find the money or rack up a huge credit card bill.

“We make sure to keep our savings above a certain amount as a ‘just in case,’” she said.

Across the country in Long Beach, California, Lisa Heacox jumped out of bed to rush her sick cat to the emergency veterinarian in the middle of the night.

“My ‘not marked for anything’ savings account absorbed the $750 bill,” she said, adding that the cat is healthy now.

Heacox and the O’Connors were able to absorb those financial shocks, but many Americans would have been stuck without a safety net.

Nearly 70 percent of Americans surveyed this year by GOBankingRates.com reported less than $1,000 in their savings account and 34 percent said they have no savings at all.

“It is scary,” said Annamaria Lusardi, a professor of economics at the George Washington University School of Business and academic director of the Global Financial Literacy Excellence Center. “This insecurity is pervasive. It’s not just in the lower income.”

At the Global Financial Literacy Excellence Center, Lusardi and her team look not just at how much Americans do—or don’t—have in their savings accounts, but also their capacity to come up with money in an emergency, something she calls “financial fragility.”

“We asked people what was their confidence of coming up with $2,000 in 30 days,” she said. “We were looking at, for example, a shock like the car breaking down, a child needing braces, going to the ER on a weekend.”

Some people reported being able to cover that money with a savings account, while others would have to borrow from friends or family or sell their belongings. In 2009, right after the recession, 50 percent of the people they surveyed would not be able to find $2,000.

The center repeated the study in 2012—40 percent couldn’t come up with $2,000 in 30 days. By 2015, that number had dropped to 34 percent—an improvement, but still a high percentage, Lusardi said.

The good news, she said, is that everyone, no matter their income or debt, can find ways to put money aside.

“They have to start in small steps,” she said, “If you put a dollar away a day, you have $365 at the end of the year.”

Lusardi also recommends joining a carpool if possible and forgoing some lunches out, then taking the money saved and putting it into an account.

Other ways to build an emergency account? Sign up for a free online budgeting tool—such as Mint.com—that keeps you accountable and encourages saving. If you use a credit card, make sure you can pay it off every month and sign up for a card that offers cash back or other rewards.

“In reality,” Lusardi said, “we can all find ways in which we can put some of the money aside.”

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