Build up a cash reserve emergency fund as soon as possible because you could need it tomorrow.
That’s the message of a new study that said that many twenty somethings are just one charge away from disaster.
The Bankrate.com study found that an unexpected expense of just $500 can upend the life of a millennial, who are young adults often in their 20s and trying to establish themselves as self-sufficient adults. However, often they face financial challenges.
“Many are already struggling with student loans,” said Claes Bell, a Bankrate.com banking analyst.
“A quarter of Americans aged 18 to 29 said students loans were their biggest expense after food and shelter,” according to the study, “Budgeting Can Crumble in Times of Trouble.”
The study also found many other Americans are also in the same cash-poor category. Their budgets are often in disarray because of an unexpected expense, Bankrate said. However, the study also showed that young people aren’t the only ones who can be cash strapped.
“Only 38% of Americans have enough money in their savings accounts to pay for unexpected expenses such as a $1,000 emergency room visit or a $500 car repair,” according to the study. Some other highlights of the study include:
*44% of senior citizens have enough savings to cover unexpected expenses, compared with 33% of millennials
*62% of those with annual household income of $75,000+ have enough savings to cover unexpected expenses, more than two and a half times the number of people with annual household income under $30,000 who can say that
*52% of college graduates have enough savings to cover unexpected expenses versus 32% of those without a college degree.
Budgeting, Bell notes, is a critical factor in not overspending. One hopeful sign in the study, he added, is that most Americans do have a household budget.
“But too few,” Bell added, “have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.”
Bell, a chartered financial analyst, says that millennials, as well as the rest of the population, should have a cash reserve of three to six months of salary.
This is a very sensible practice that all working people should follow. But possibly they should have more than six months cash reserve.
Suppose you have a small cash reserve. Now an unexpected expense comes along and you are able to pay it, but it wipes out your entire reserve. Now, if another unexpected expense suddenly happens, then you end up financing it with credit card debt.
That puts you into a deep money hole that it might take months or possibly years to escape. Yet some people are deliberately cash poor.
Many people don’t like cash. On these days of low interest rates, they argue, it earns almost nothing so why have very much of it?
It’s because cash can bring peace of mind against that unpredictable event that sometimes happens when you least expect it. When that charge comes out of the blue and hits you, then you’ll be able to survive without going into debt.
Always have at least a six month cash reserve on hand. Better than that, maybe try for nine months.