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Even wealthy households can't cover an unexpected cost of $ 400 – the spotty fool

Saving for the future is not easy, especially when you probably have more financial responsibilities that pull your money in different directions. Between the mortgage loan, the car payments and all the other household bills, finding the extra cash you can spend on your savings is a challenge. So when it comes to establishing an emergency fund, it is tempting to push this task to the bottom of your priority list.

Many households struggle to make money for unexpected expenses – about 41% of US adults said they would not be able to cover an unexpected cost of $ 400, according to a report by the Center for Retirement Research at Boston College. Surprisingly, those with lower incomes tended to struggle more; 72% of households earning less than $ 25,000 a year couldn't make $ 400, the survey said.

However, not only low-income workers struggle to save. According to the survey, almost one in five households earning $ 1

00,000 or more per year could not find an additional $ 400 for an unexpected expense.

More income does not always solve all your money problems. No matter how much you earn, it is important to set your financial priorities so you can be prepared for any obstacle that comes your way.

  An Emergency Badge

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An Emergency Fund

An Emergency Fund may seem like just another task on your long financial task list, so it is tempting to move it to the back burner and focus on more immediate responsibilities. However, building an emergency fund can cost you more money in the long run.

If you don't have an emergency fund and have an unexpected expense, you have a few options. First, you can charge the expenses on your credit card or take a loan to cover the costs. But if you don't have the money now, chances are you may not have it in a month or two when it's time to make the credit card payment or pay off your loan. And the longer it takes to pay off the debt, the more you will end up paying in interest. Once you have paid off your debt, you can potentially pay hundreds or even thousands of dollars only in interest payments.

For example, say you had to take an emergency trip to the hospital and you are being billed with a $ 1,000 bill that you charged your credit card. The interest rate on the credit card is 18% and you pay $ 100 per month. At that rate, it will take about a year to pay off the debt and you will end up paying around $ 100 in interest. If more unexpected expenses appear during that time, your debt continues to climb and you pay even more in interest.

Another option when paying for unexpected expenses is to collect the money from the pension fund. Especially if you only need a few hundred dollars, it may seem that the small amount would not do anything for your money. However, it can make a bigger difference than you thought.

First, you may be charged a 10% fee to withdraw your pension money before reaching 59 1/2. Second, you may have to pay income tax on the amount you charge so your cash does not come as far as you think. And thirdly, when you withdraw money from your pension fund, it makes it harder for your savings to benefit from increasing growth – and even relatively small withdrawals can damage your long-term savings.

For example, say you have $ 10,000 in your pension fund and you charge $ 1,000 to cover an emergency. Let's also say you saved $ 150 a month, which you continue to do even after you withdraw. If you did not withdraw any of your savings, you would have saved around $ 356,000 after 35 years, provided you earn a 7% annual return. But if you were to take out $ 1000, you would only have saved $ 345,000, all other factors remained the same. In other words, a $ 1000 withdrawal can eventually result in lost potential revenue of more than $ 10,000 over the long term. And if you continually pull out of your pension fund, it can cost you even more.

How to create an emergency fund

No matter how much you earn, an emergency fund is an important component of your financial health. But if you don't even have enough money to cover a $ 400 charge, how do you build an emergency fund?

If money is cramped, the key is to build your savings gradually. Most experts recommend saving enough to cover expenses of three to six months in case you lose your job. You don't have to bring those cash overnight, but you may need to make some sacrifices so you have something to add to your emergency fund every month while still paying all your bills.

Start by tracking your spending to a clear idea of ​​how to spend your money every month. (If that sounds boring, there are several apps that track your money for you and update you where your money goes.) When you know where you spend your money, see if there are areas where you can make cuts. Remove any unnecessary costs and then consider if you can live without any of the cozy costs as well.

One thing to keep in mind when creating an emergency fund is that these victims will be temporary – when you reach goals, your budget can return to normal. So if you turn off with the victims you have to take, remember that it won't last forever.

When you have a long list of bills to pay, it may not seem like building an emergency fund the most pressing task. But you never know when an unexpected expense will emerge, and an emergency fund can prepare you for any financial hurdle you can face.

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