$500 Is Better Than Nothing

7) Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I just visited an American debt clock site. The official U.S. debt is currently $12.5 trillion. The shadow debt which includes all future obligations including Social Security and Medicare is $74.5 trillion, but who cares if you have to put a car repair on a credit card, knowing you can’t pay it off at the end of the month. The rainy day fund is number seven on my list of ten basics for young couples. Because we had some savings (not any where near six months) and I was able to obtain some scholarship money, I was able to return to engineering school when I lost my job during the last big recession in the early 1980s without incurring any student debt. That feat would be much more difficult today, as the cost of education, fueled by government guaranteed student loans, has greatly outpaced inflation.

Like most people who write about such things, I still stand by the six months goal, but that is a very hard goal for most couples. Some writers give a nod to three months, but the current recession has conclusively proven that is not enough. In fact the average length of unemployment is currently 30.2 weeks and rising. Even six months in a rainy day fund is not enough.

The well know personal finance author, Liz Weston, recently put an entirely different spin on this problem in an article titled, “Why You Need $500 in the Bank.” I really like the concept. It is pretty easy for most couples to put an extra $100 in their checking account and an extra $400 in savings. This can be accomplished by very simple methods, like giving up the daily latte (Suze Orman’s go to example).

Even a $500 cushion can protect your credit card from unfortunate events, like the car repairs mentioned at the beginning of this article. The author contends that for people who are living from paycheck to paycheck, the first $500 is the hardest. Once they see that they can actually reach a financial goal and experience the benefits of avoiding the credit card fix every time something goes wrong, the savings habit is established and $500 becomes $10,000.

Other ideas for the first $500 can be found in The Debt Snowflake (also a Liz Weston idea). They include ideas like, yard sales, tax refund checks, temporary part time jobs, and saving change in a jar.

The statistics are unbelievably horrendous. The following table is from the Federal Reserve Board’s 2004 Survey of Consumer Finances.


U.S. households with less than $500 in the bank

Age group Percentage

Under 35-------34.5%
35-44-----------25.1%
45-54-----------22.1%
55-64-----------19.0%
65-74-----------18.8%
75 and over----14.9%