Tough love needed to face financial failures

Written by Gary Silverman, CFP®

Howdy! This is one of my rants about how the “average” American is handling their finances.  I thought the “Howdy”would cushion some of the blow.

Here’s the issue. According to a recent survey from Bankrate.com, nearly 3 out of 10 folks in the U.S. have no emergency savings. We’re not talking about them not having “enough” emergency savings; we’re talking no emergency savings. None. Zip. And it’s been getting worse.

Now I can think of a few reasons for this. After all, if you’ve just had an emergency then you may have used up your emergency fund. But most emergencies shouldn’t use up an emergency fund.  Besides, it’s hard for me to believe that 29% of us had emergencies large enough to deplete the emergency savings, which means it probably wasn’t there to begin with.  Although many people suffered in the 2008 financial crisis, it wasn’t 29% of us. Now in 2015, the crisis has abated quite a bit.

The folks at Bankrate.com think a lot of this has to do with the anemic income gains of the last few years. As readers of my column know, inflation adjusted income hasn’t grown much for most of the last couple decades. So this is a real concern.

And here is the part when I start saying things you might not like. Simply put, if something bad happens to you, you can’t act like nothing bad happened to you.

Here’s what I mean. You’ve counted on overtime for the last 5 years as part of your normal pay. The jerks in management have decided they want to minimize overtime. Maybe medical bills put you through bankruptcy (a very common reason). Or your industry has fallen victim of the globalization sucking away American jobs.

Regardless of the reason, your budget is shot. It will take you time to reduce your spending to your new income reality. You may be living on 5, 10, or 25% less than you were last year. You can’t imagine how you can tighten the belt tight enough to matter. You have a mortgage, kids in college, and a car to pay on. So you dig into your emergency savings.

Your savings can be very useful during the transition to your new reality. But it is a transition. You need to actually lower your spending as much as your income went down and then some in order to rebuild your savings.

You can’t keep spending like you were. Yes, it’s not fair. Your kids will suffer. Your spouse will be unhappy. Heck, you may have to move. None of this is good. Yet just because it is unpleasant doesn’t mean you should avoid it. That’s part of being an adult.

Yes, some of the 29% with no emergency savings are in such dire straits that they feel desperately stuck. My guess is that most of them can’t fathom the pain they’ll confront to dig themselves out of the hole. I understand. It is hard. But it is the reality. 

This article was published in the Wichita Falls Times Record News Your Money column on September 20, 2015.