Nearly two-thirds of Americans are a single missed paycheck away from financial disaster. The math is straightforward and brutal; it’s all about the odds. Roughly four in ten Americans are going to run into a significant and unexpected expense during the year. According to a new survey by BankRate.com, only fifty seven percent of Americans made it through 2015 without incurring an unexpected large expense. Yet sixty three percent of that same pool of people don’t have the savings to cover it.
Like a giant game of financial Musical Chairs, the unflinching math says a significant number of people are going to be facing unexpected large expenses without the means to pay the bills. For thirteen percent, that means turning to a credit card. Let’s say someone charges that $1,000 unexpected expense on a credit card with an eighteen percent interest rate. Using two percent to calculate the minimum payment would be $20. At the minimum payment it would take 131 months, more than ten years, to pay off that debt and would rack up $1,396.77 in interest, more than the original bill.
For a third of those meeting unexpected expenses with no savings paying that unexpected bill means cutting back on other expenses, another quarter said they’d borrow it from friends and relatives. Two in ten said they’d set up some kind of payment plan.
Spending Cuts Bad News For Restaurants, Comcast, AT&T, Starbucks
To save money next year, nearly sixty percent said they would cut back on eating out, bad news for the Restaurant and Bar Association. Nearly half said they’d cut cable and paid television channels. Another forty percent would say goodbye to Starbucks and their local coffee shop. Another thirty nine percent would cut their phone plan and a third would reduce their alcohol intake. Hard times demand drastic measures.
Why Is Saving $1,000 So Hard?
These days a grand doesn’t go far and isn’t that much money. So, how is it that so many people have trouble raising even that small sum? The biggest expense for most people is housing, eating up between thirty and forty percent of their income. Rents have gone up five percent the last three years in a row. The next biggest expense is transportation, accounting for seventeen percent. For younger people they have all that, plus student loan debt which handicaps them during their most economically productive years.
Another factor that makes savings so hard is the subtle transition to the “gotcha” economy. Where that’s most obvious is in the airline, hotel and rental car businesses. In order to game online booking sites, those industries advertise low rates, then tack on fees to raise margins. Everything associated with travel ends up costing more than you budgeted. Book concert tickets online, hello service fees. Restaurants raise check prices with ala carte menus, so that salad that used to come with your entree now sets you back eight dollars. It’s a cynical game that doesn’t show up in the Federal Reserve’s inflation calculation but still ends up coming out of your pocket.
Gotcha fees are cropping up in more and more places. Any parent with a child in school already knows that feeling. Today even public school kids are coming home with something that costs money. Even activities that used to be free, like field trips, art supplies, after school activities, and sporting programs are all incurring fees in some school districts. That tiny nick on your finances, multiplied across a myriad of industries, eventually starts to add up.
2016 is shaping up to be a tough year economically. Don’t get caught short when an unexpected expense strikes. Make those cuts in spending now and bank ahead some cash. It’s a rough financial world and it’s only going to get worse.