Years ago, I wrote a post about my $100,000 friend — who made 6 figures but lived paycheck to paycheck.
I know several people like this. And now, the data to back it up.
According to the Wall Street Journal, nearly half of Americans say they “definitely or probably” could not come up with $2,000 if they needed to.
“The survey asked a simple question, “If you were to face a $2,000 unexpected expense in the next month, how would you get the funds you need?” In the U.S., 24.9% of respondents reported being certainly able, 25.1% probably able, 22.2% probably unable and 27.9% certainly unable.”
Why $2,000 as the dollar amount? As it turns out, that is a good proxy for the typical unexpected repairs most of us encounter in day to day life:
“The $2,000 figure “reflects the order of magnitude of the cost of an unanticipated major car repair, a large copayment on a medical expense, legal expenses, or a home repair,” the authors write. On a more concrete basis, the authors cite $2,000 as the cost of an auto transmission replacement and research that reported low-income families claim to need about $1500 in savings for emergencies.”
Even sadder are the ways in which people say they would TRY to come up with the money, including such gems as:
- Credit cards
- Payday loans (WTF?)
- Selling possessions
These are the dreams of someone who has never systematically thought about what they would do if they needed money for an emergency.
As I’ve always said, one of the primary differences between Rich people and others is that Rich people plan before they need to.
Some points to consider:
- Financial surprises are a part of life — praying they don’t occur is not a viable strategy. That’s why I have a Stupid Mistakes sub-account in ING
- There are people who have such tight living situations — low incomes, multiple kids, unstable jobs — that they live paycheck to paycheck. But the unwelcome truth is that most people in their 20s who live paycheck to paycheck simply have a spending problem
- Telling yourself, “I really should set up an emergency fund” is the same old tired song that produces little behavioral change. Instead, automation will automatically grow your savings without you even noticing the money going to your savings account
- Another claim we make is, “I’ll do it later…when I have more money.” Yet in your late 20s/early 30s, most people get married, which incurs huge costs. Then there are several predictable costs including travel, kids, a house, and more. My friends at Vanguard know about the “trough of saving,” which makes it incredibly difficult to save in your 30s. There is a simple solution — The 10 Year Savings Strategy — yet the vast majority of people never take 1 day to implement it.
- There are Big Wins for savings that you could implement immediate to kickstart your savings account with thousands of dollars
- And there’s also earning more money. Earning side income (apart from your full-time job) lets you throttle your income up or down at will, and respond to any financial crises/opportunities that arise
- You don’t need to invent the next Google or Facebook to make money on the side. This turns out to be a HUGE psychological barrier of people who want to earn more money. They genuinely believe they have to quit their job and start the next Google, instead of earning money on the side (much more likely)
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Big car repair coming up? Want to take a vacation in three months? Instead of worrying, you’ll know exactly how to generate the extra income needed to handle these things — and use systems to semi-automate the process.