CEDAR HILLS — For Melody Hillam, financial problems centered on transportation.
If the family car broke down or if the tires had to be replaced, she had no backup plan. "We needed to have our car fixed," she says.
But there were no savings to pay for it.
If there is any comfort in not having an emergency fund, it’s comfort from not being the only people in that situation.
Bankrate's Financial Security Index survey in June, conducted by Princeton Survey Research Associates International, found that 28 percent of Americans have no emergency savings at all. Twenty-one percent had less than three months worth of savings to cover ordinary expenses.
The Corporation for Enterprise Development found that 43.1 percent of Americans do not have enough money saved to even subsist at the poverty level for three months if their income was suddenly cut off. For a large number of Americans, savings is minuscule or non-existent and they are one paycheck or one minor setback from financial disaster.
Will VanderToolen, director of counseling services at AAA Fair Credit Foundation in Salt Lake City, sees the results of this sort of money management all the time.
Instead of turning to savings like people used to, VanderToolen says people now turn to other sources.
"Credit cards have become people's emergency fund," he says. "They don't think they need money. 'That is what a credit card is for,' they say."
And that is how Hillam and her husband Todd in Cedar Hills handled their family's financial setbacks.
"Our emergency fund ended up being our credit card," she says. So when the car needed fixing, the plastic came out and paid the bill.
But the problem with credit cards, Hillam found, was it added an extra bill. "Our household budget was so tight already with our income," she says. "It became one more thing to pay and it was hard to find the money. And it seemed to grow and grow."
VanderToolen says the interest on credit cards and debt adds up. "If people could have saved the money they paid on interest, they would have quite a bit of money," he says.
But many people don't, and they don't put aside money either.
Her husband Todd receives quarterly bonuses from his work.
"In the past we would just think of something to spend it on," she says, "such as a jaunt to Park City. … We treated it like it was extra cash."
VanderToolen says this mentality isn't uncommon. "It is easy for people to spend money on fast foods or a new ringtone or mp3 song download — and they all add up quickly," he says. "Yet it seems impossible for people to stick $10 into an emergency account. … If people would look at and trim their spending habits — the little things we like to spend on fun things — they could put it into an emergency fund. But what is fun about that?"
VanderToolen says people could trim between 15 to 20 percent out of their budget without even missing it.
"Once that emergency hits," VanderToolen says, "you will wish you were stricter and set more aside. But you can't turn back the clock."
Hillam's family received a little extra help in turning their finances around last year. She went through a yearlong financial/education makeover courtesy of Deseret Media Companies' "Imagine a Happier You" campaign and its partners, AAA Fair Credit, Merrill Lynch and Zions Bank, who each mentored one of three women in the program. Building an emergency fund was part of that process.
Hillam's family, which includes five children, benefited from the fund almost immediately.
When VanderToolen counsels people at AAA Fair Credit he likes to ask them, "When will your next financial emergency occur?"
The answer is, of course, they don't know. The point is they will need cash.
But how much?
VanderToolen says it used to be that financial experts would recommend people build up an emergency fund that would cover six to nine months of expenses. Sometimes they would even say a full year of expenses.
"But I don't see that anymore," he says.
Now, he says, experts are recommending three to six months of expenses. "Why are they lowering the bar?" VanderToolen said.
He thinks it may be because it sounds less intimidating. But he sticks to the six months recommendation. "But it is not six months of income," he says. It isn't even six months of expenses, in his view.
Instead, it is six months of a "bare bones budget."
"Look, it is an emergency budget," he says. "You look at how drastically you need to cut your spending to get by."
So even though a family might take home $4,200 a month, they may — under emergency conditions — be able to get by on $2,500 a month. So a six-month emergency fund for this family could be $15,000.
Going to a lower emergency budget means doing things like cancelling cable and other unnecessary expenses.
But VanderToolen says people should start small and just try to build a $1,000 emergency fund first. That amount will cover most medical expenses, car repairs or house repairs.
"You can always focus on the larger fund later," he says.
Even when the emergency fund is small, it can help. If only $400 is saved, it immediately reduces a $1,000 emergency bill to $600. "Any amount you can set aside is going to be beneficial," he says. "It is going to take a long time to build up an emergency fund — even years — but that is OK."
How the fund grows
Hillam took a paper route to help pay off the credit card. The family held a garage sale to start building a basic $1,000 emergency fund.
Almost as soon as the fund was in place, Hillam had to use it. Her baby son Ty was taken by helicopter to Primary Children's Medical Center in Salt Lake City with a bad case of RSV. The insurance deductable was $1,000. "I'm grateful we had it," she says. "We would have had to put it on the credit card."
VanderToolen gave several steps in the creation of an emergency fund:
1. Figure out how much to set aside
Make an inventory of where your money goes. What is the cash flow? This helps you decide how much money you can set aside periodically to build the fund.
"You have to trim and adjust the amount put in," VanderToolen says, "so it is substantial enough to make a dent in building the fund, but not too high so you have no money left over for fun."
2. Decide where to store the fund
VanderToolen recommends keeping a separate account. Matt Armstrong, a certified financial planner with Savant Capital Management in Rockford, Ill. recommends to keep the emergency fund liquid such as in a high interest savings account at a bank or credit union. Armostrong all suggests a money market account through a bank or investment advisor's custodian like TD Ameritrade or Schwab. "You want to keep your emergency money in a place you can access readily and without delay," he says. "Keep your emergency fund segregated from the account you use to pay bills and cover other expenses."
3. Make saving automatic
Have a set amount automatically transferred from your checking account to the emergency savings account on a monthly or biweekly basis. Alternatively, VanderToolen says, mark a day on your calendar to transfer the money.
4. Keep evaluating
VanderToolen says the $1,000 goal is just the first step. Keep building to that point, and reassess along the way.
5. Adjust up or down
Once the basic $1,000 goal is met, VanderToolen says make a decision about how fast you should build the fund to the six-month level. Adjust the amount of periodic deposits to match that goal.
The other question about emergency funds is when to withdraw money from the account.
"Not to buy a big screen TV," VanderToolen says.
He says it is best to use it only for things like medical expenses, vehicle repairs (when you are short on cash), if something breaks in the home and similar things.
Unemployment or underemployment is also another good use for the fund. "Although it drains it quickly," he says.
But don't worry. The emergencies will come. "With a family our size," Hillam says, "there are always needs and places for the fund. We are smarter now about money and using it this way is the best decision."
She encourages people to build a fund as fast as they can.
Her fund is built back up. But probably not for long.
Another medical emergency (Ty has been diagnosed with type 1 diabetes) came along.
"We haven't got the bill yet," she says, "but I am sure it will drain it."
But that is what the fund is for.