Money Talk: Emergency funds can be critical, especially for black people

By Rodney A Brooks

No matter what age you are or what stage of life you are in, you need an emergency fund. And you need that before you start saving for your future.

So what exactly is an emergency fund and why is it so important? Think of it as the buffer that keeps you going when something happens without having to resort to high-yield credit cards, payday lenders, and friends.

To be clear, I’m not talking about the three to six months of living expenses that financial advisors say you’ll need if you lose your job.

Things happen in real life. An emergency fund, for most of us, is cash that you would need in a real emergency – your car breaks down; Your air conditioner stops working during a heat wave, or you need a new water heater.

The truth is that less than half of Americans would have enough savings to cover a $1,000 emergency expense. Bankrate, a consumer finance company, asked in a survey, “How would you pay for an unexpected $1,000 expense?”

  • Only 44 percent could pay from savings
  • 20 percent would pay by credit card
  • 15 percent would pay for it, but cut spending in other areas
  • 10 percent would borrow it from friends
  • 4 percent would take out a personal loan

According to the Pew Research Center, less than half of black Americans say they have an emergency fund and have taken several steps to make ends meet. This survey also found that Black Americans typically experience higher levels of economic insecurity than Americans overall. Keep in mind that the average net worth of a black family is only 1/10th that of a white family ($17,100 vs. $171,000).

Are you willing to pay for the unexpected without resorting to expensive payday loans or high-interest credit cards? According to WalletHub, the average credit card interest rate in the second quarter of 2022 was 19.13 percent for new offers and 15.13 percent for existing accounts.

Things have gotten worse since the pandemic. Inflation is rampant, shortages are everywhere and the prices of everything are still rising. A set of new tires can cost you $600 or more, although costs vary by model and use. Plumbers can cost $45 to $150 an hour with minimum service fees.

How much you need in this emergency fund depends on your personal situation. But you must have some savings to get through these severe crises.

Here’s how you can build an emergency fund.

Start by creating a budget. See how your income and expenses match up and where you can save.

Set a sensible financial goal for your individual emergency fund.

Set aside $20 a week if you have it, or $10 if you don’t. Don’t carry it around, put it in a book or in a sock drawer. When you get to a few hundred, put it in a bank savings account. You won’t make much from the money, but you want it in cash.

Set aside your tax refund or raise instead of paying bills.

Cut out one restaurant meal a month or one weekly Starbucks visit and put the money in an emergency fund instead.

Take a temporary side job or a part-time job. Save until you have $1,000.

The reason you might want to set up an emergency fund before you start saving/investing: You don’t want to pull money out of a mutual fund or retirement fund to pay for an unexpected emergency. Not only will you be messing with your investment returns, but you may also face tax consequences.

You must treat this emergency fund as separate and only your first step toward and investment in your future and retirement.

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