Last month’s most terrifying financial news comes from a paper published by the National Bureau of Economic Research: Financially Fragile Households.
From the abstract: This paper examines households’ financial fragility by looking at their capacity to come up with $2,000 in 30 days. … Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans.
The researchers also report that the ranks of the couldn’t-come-up-with-$2,000-in-one-month class includes many people with incomes that put them well above the poverty line, reflecting “either a substantially weaker financial position than one would expect, or a very high level of anxiety or pessimism. Both are important in terms of behavior and for public policy.”
But a question: How is the fact that people with high enough incomes to save $2,000 choose not to save $2,000 a matter of public policy?
The Wall Street Journal has details on how the results in the United States compare to other industrialized nations, and The Brookings Institution has posted the report in its entirety online for free as a PDF. The researchers note that “the level of financial fragility we identify suggests business opportunities for firms to provide better products for households.” [time-link title="(See the top ten things you didn't know about money)" url=http://www.time.com/time/specials/packages/article/0,28804,1914560_1914558_1914575,00.html]
But I’m not so sure that the problem is a lack of products available to help people who don’t have $2,000 in liquid savings. Rather, there is simply no way to have a reasonably secure, reasonably low-anxiety life without access to that cash because, let’s face it: There are an infinite number of relatively mundane emergencies that might require $2,000: car problems, kid problems, or plumbing problems on taco night.
The importance of having a small emergency fund is why saving $1,000 is Baby Step #1 in Dave Ramsey’s Total Money Makeover. “An emergency fund is for those unexpected events in life that you can’t plan for,” he writes. “It’s not a matter of if these events will happen; it’s simply a matter of when they will happen. This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!”
Much of the blog chatter on this study has focused on the macroeconomic causes. As one commenter whined, “[It’s] hard to be competent at methodical saving when there is nothing to save.”
Here’s the thing: I’d like to see a Venn diagram that shows the percentage of Americans who don’t have a $2,000 emergency fund alongside the percentage of Americans who also own a Snuggie or a Royal Wedding collector plate. We don’t need innovative financial products to help consumers deal with the consequences of not having two nickels to rub together in case of an emergency. For large, long-term emergencies, we need a safety net. That’s why we have unemployment. Call me an anarchist, but if you need some sort of outside help when your transmission breaks, that’s the problem and the transmission is the symptom. [time-link title="(See what to do when your adult kids are terrible with money)" url=http://www.time.com/time/specials/packages/article/0,28804,2069211_2069210_2069189,00.html]
The bottom line is this: If you don’t have a $2,000 emergency fund, your life is going to be miserable because every single financial contretemps is going to make you scared instead of just annoyed. A $2,000 emergency fund is $1 a day for less than three years. If you’ve been working at some kind of job for three years and haven’t been able to scrape together a dollar a day, go over your budget with a fine-tooth comb. It’s just not that much money. Find a way to do it. Your blood pressure will thank you.