According to a Bankrate study, just under half of all Americans (49%) have more emergency savings than they do credit card debt.
On the bright side
The good news is that it was only 44% last year, which means 5% more of Americans now have either less credit card debt or more emergency savings. (Hopefully, both.)
So I guess Americans’ financial situations are improving more than expected.
And it’s worth noting that only 35% of respondents had more credit card debt than savings. The other 16% had no credit card debt at all — but also no savings. Which is hardly ideal, but I guess it’s better than debt?
Which is more important?
Of course, we have to ask ourselves how much this metric actually matters.
Is it better to have more in your emergency fund than you owe on your card? Given credit cards’ high interest rates, wouldn’t you be better served paying down your debt before building up your EF?
Well, as with everything in personal finance, I guess that depends on your situation. Tim and I didn’t save any emergency fund while we were paying off debt. Our government checks (my disability, his unemployment) meant that rent and utilities could always be covered. And since large unexpected expenses kept cropping up, we would be constantly depleting and replenishing the emergency fund rather than focusing on credit card debt. It just didn’t make sense.
But of course most people aren’t in that situation. If you don’t have guaranteed income, it’s a very bad idea to have no emergency savings even if you do have debt. In case of job loss or other income reduction, you need to be able to pay for basic bills: housing, utilities, gas for the car (to get to job interviews, for example), etc.
How much do they owe?
Still, it’s tough to put money in the bank when you have double-digit interest accruing on credit card debt. So at what point does it make sense to halt your emergency savings and focus on credit card debt?
And could it be that the 35% of people with more credit card debt than savings simply owe a lot of money to the card companies?
After all, the average credit card debt (for balance-carrying households) is $9,333. Should you really have $10,000 in emergency savings while you’re that deeply in debt? At what point should your focus shift to the debt? How much padding is enough?
Of course, Dave Ramsey says to save up $1,0000, then focus on paying down debt. That’s… not a lot.
Pros and cons
On the one hand, $1,000 is a good idea because it’s an achievable goal for many households. It’s encouraging to hit the mark, so like the debt snowball, setting a smaller goal can be good motivation even if it doesn’t make the most sense mathematically. And to be fair, $1,000 will cover a fair number of small emergencies, which households might otherwise have to go deeper into debt for: new tires, a lot of car repairs, many doctor/test bills, etc.
But what if you get laid off in the middle of your debt payoff? These days, $1,000 won’t cover most mortgages/many people’s rent for even a single month. And in most cases you can’t pay for housing with a credit card. So $1,000 probably isn’t the best end goal, even if it’s just while you’re shoveling money at card debt.
And as the coronavirus panic/shutdown is proving, you don’t even need to lose your job to have an income emergency. Unless you make less than $12.50 an hour, a $1,000 EF isn’t even going to cover lost wages of a two-week quarantine. And it’s hard to say how long some businesses are going to be telling employees not to come in because too few customers are around. I’d guess two weeks would be the absolute minimum.
Then again, you don’t want too much money sitting in even a high-yield savings account while Visa, Mastercard, et al are racking up interest. And even if you couldn’t get a job you wanted, the labor market is pretty good right now.
So in the interim you could probably get a job to pay the most pressing bills while you looked for something in your field. (Coronavirus shutdown notwithstanding, of course. Even then — and even with people self-isolating — I’d imagine there will always be a demand for Lyft/Uber drivers and probably plenty for food delivery app workers too.)
So again, what’s a good compromise?
Only you can answer that
I guess it partly depends on how much you’re able to save each month. If it’s going to take you a year or more just to save $1,000, then it’s probably a pretty terrible idea to wait until you hit that threshold before getting serious about paying down your cards. You should split your attention between the two goals and try to focus on the small victories of incremental progress.
But if you’re lucky (and frugal) enough to be able to have several hundred a month left after covering expenses/paying bills, then I’d say don’t stop at $1,000 in your EF. Split your attention at least 1:2 (maybe even 1:1) between your emergency fund and credit card debt until you have enough to pay three month’s housing and utilities expenses. (You can get food stamps and go to food banks, so saving enough for three months’ of groceries is less important.)
With three months’ rent/mortgage and utilities, in case of job loss you can still keep a roof over your head and the lights/heat on for a few months while you try to get back to your previous income levels.
Of course, if your job/income is somehow guaranteed, you need less padding. As we in the PF realm like to say, personal finance is personal. No advice is going to fit everyone.
In the end, you have to work within your comfort zone, figure out what will make you feel the most safe — while still taking into account enough actual math to be sure you’re at least somewhat covered in a worst-case scenario.
Maybe the statistic is good?
So all in all, I don’t think it’s the worst thing in the world that 35% of Americans have more credit card debt than emergency savings.
Is it great? No. Ideally, far fewer people in this country would have any credit card debt at all, and far more would have a healthy emergency fund.
But given basic math, it makes more sense for most people to be focused on paying down the debt on their plastic than to be building a super-robust emergency fund.
So maybe it’s a good thing that 35% of people aren’t waiting until their savings exceed their debt before focusing on paying back the card companies. Maybe it shows that Americans are just being more practical than we think (arguably, minus the part where they got into debt in the first place).
When does it make more sense to focus on debt than savings? What do you think is a smart amount to save in an emergency fund?