My childhood piggy bank was made of shiny silver metal, with a barrel-shaped body that split open to let me pour out my wealth in a jingly pile. Plinking coins into a piggy bank comes naturally to children, but as we head into adulthood, a shocking number of us lose the habit.
A survey released last week by financial information site Bankrate.com found that 24 percent of Americans have more credit card debt than emergency savings, up from 22 percent in last year’s survey. An additional 17 percent have no credit card debt but also lack any savings.
“Too many households don’t have enough savings, and many of them are still carrying high-cost credit card debt,’’ says Greg McBride, Bankrate’s chief financial analyst. “That high-cost debt is a very stiff headwind on the journey toward financial security.’’
So how can you smooth your path?
The goal is to simultaneously lower credit card debt and build up an emergency fund you can dip into if you, say, need a major car repair or get laid off. It should be enough to cover basic expenses for at least six months, and up to nine or even 12 months if you are the sole breadwinner or self-employed, McBride says.
“Savings are your buffer between you and high-interest-rate credit card debt when unexpected expenses arise,’’ McBride says.
To achieve this security, you should first make your savings automatic. Set up a direct deposit that will fund your savings account from every paycheck without any additional effort. This practice will force you to live on less than you make. A tighter budget will naturally lead you to trim your costs, reducing credit card spending.
To bulk up your savings even more, keep track of your spending and tally it at the end of each month. If your income exceeded your expenses, transfer the difference into savings, McBride recommends.
Emergency savings should always be kept easily accessible in a federally insured account at a bank or credit union. McBride recommends online banking, which will probably yield the highest annual rate of return, currently about 1 percent. The rate might be low, he notes, but a conservative approach is best when saving for emergencies.
“You can’t afford to chase returns,’’ he says. “You can’t afford to take risk.’’
Have a consumer question or complaint? Reach Sarah Shemkus at seshemkus@gmail.com.
