The emergency fund is a bust.
Millions of Americans don't have one, and some of those who do resist tapping what they've saved. I'd like to propose an alternative for both sets of people: The "oh, crap!" fund, a savings account for not-quite-emergency expenses.
One of the reasons people don't have emergency funds is misplaced optimism. People think that if they're healthy, they'll stay healthy. If they're employed, ditto. The car will keep running, the roof will never need to be replaced and, since everybody's a better-than-average driver, there won't be any accidents.
Behavioral scientists call that "recency bias," which is the delusion that whatever happened in the recent past will continue into the indefinite future.
Everyone, though, has experienced "oh, crap!" moments: the no-parking sign they didn't see, the crown the dentist says they need, the smartphone dropped in the toilet. A relatively small amount in such a fund can keep people from turning to expensive credit cards or payday loans.
"The power of just a few hundred dollars of savings can really help reduce the use of short-term, high-cost lending," says John Thompson, chief program officer for the Center for Financial Services Innovation, a nonprofit that promotes financial health.
Having a cushion is particularly important if you're a homeowner. In a recent Harris Poll survey commissioned by NerdWallet, nearly two-thirds of homeowners say they've experienced anxiety about their home, with unexpected home repair costs the top cause of anxiety.
The "oh, crap!" fund is designed to be spent, not hoarded. Emergency funds are meant to be spent, too, but people are often reluctant to part with money labeled as savings, says financial literacy expert and Rutgers University professor Barbara O'Neill.
"People hate to experience losses, (and) pulling money out of a savings account feels like a loss," O'Neill says.
Many people also give up on the idea of an emergency fund because any money they manage to put aside is quickly wiped out by unexpected expenses. They don't realize that the emergency fund did its job by keeping those expenses from going on a credit card, or that saving for unexpected expenses is a "rinse and repeat" deal. You don't just hit a savings goal and you're done. You save, you spend, and then you save again.
The "oh, crap!" fund can help people build that muscle. It can be viewed as a transactional account with constant additions and subtractions as life unfolds. The fund also can help people who already have savings they don't want to touch except in big emergencies, such as a job loss.
The first "oh, crap!" goal can be pretty modest, say $500. For those new to saving, here's how to get there.
1. SET UP A DEDICATED ACCOUNT
Consider using an online bank, since most don't have minimum balance requirements or account fees and they'll let you name the account almost anything you'd like (although anything stronger than the word "crap" might get you a "tut tut "” let's keep it clean" auto-response from the bank).
Some prepaid cards, such as American Express Bluebird and WalMart MoneyCard, have a savings feature if you don't use bank accounts.
2. AUTOMATE IT, IF YOU CAN
Those with regular paychecks and bank accounts can set up automatic transfers, so $10 or $20 or whatever amount you like gets swept into a savings account each pay period. Or you can use technology that automatically rounds up your purchases to the nearest dollar and deposits the money in savings.
Bank of America's Keep the Change debit card and Chime, a mobile bank account, both offer this option. Or try Digit, an app that analyzes your spending and moves unneeded funds to a savings account.
3. IF YOU CAN'T AUTOMATE, MAKE A RULE
Decide to put aside a set dollar amount or percentage from every check or other income you receive. Examples: "I'll save $10 from every paycheck and 10 percent of any windfalls."
4. DON'T STOP
Once you're in the habit of saving, keep going. Your next goal can be $2,000, which is the median cost of the largest financial shock experienced by households studied by the Pew Charitable Trusts.
After that, you can shoot for the traditional emergency fund recommendation of building a fund equal to three months' worth of expenses.
Even as you do, though, you may still want to keep a separate fund for those everyday mishaps. Because crap happens.
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