Many of us save for retirement, vacations and sometimes a little treat for ourselves — but when it comes to some expenses, we miss the mark.
A survey by Bankrate.com found that nearly four in 10 Americans don’t have enough money in their savings account to pay for unexpected expenses like car repairs or ER visits. What makes that even worse is the fact that nearly half (47%) of all Americans experienced unforeseen expenses in the previous 12 months, according to a 2014 survey by American Express — many of which they easily could have planned for. More than four in 10 Americans got hit with car-related and health-care expenses they didn’t expect, and roughly one in three with house-related expenses like repairs. Still others found themselves facing unforeseen education and insurance bills.
“I call these ‘unruly expenses’ — they seem to come out of nowhere,” says Abby Morton, a certified financial planner with SagePath Financial Planning. “If they’re not recurring monthly, they’re not on people’s radar.”
Experts say that, in general, Americans should have three to nine months of living expenses in savings that they can spend on unforeseen expenses like some of the above; if you are older and/or have dependents, you may want to be even more conservative and save 12 months of expenses, says Anthony D. Criscuolo, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale.
But the reality is that most Americans aren’t even close to having this amount of savings — and they’re saving less than in the past. Research from the Employee Benefit Research Institute released in 2014 found that 36% of American workers have less than $1,000 in total savings and investments (up significantly from 28% last year) excluding their home and pension, and fully six in 10 have less than $25,000.
The lesson: Americans should start saving more, by putting a little bit of money away each month (how much you save each month will depend on your budget) into their savings until they have six to 12 months of income saved up, experts say. Lesley Kilcullin, a certified financial planner at Fiduciary Advisors in St. Louis, recommends putting the money in a savings account outside of your personal bank (you can look for savings account options that offer the best interest rates on a site like Bankrate.com or NerdWallet.com), so you aren’t tempted to use the money for daily expenses. Other experts say that it may even be a good idea — at least in this low-rate environment — to put that fund into stocks and bonds.
You should also save beyond this so-called emergency fund “for the large, one-time, unexpected things, like car repairs, home fixes, or health care bills,” says Criscuolo. “As a starting point, if you have insurance, you should at least save the amounts of your deductibles,” he says.
Beyond that, experts have advice on how to save for each of these common unforeseen expenses.
While drivers expect to shell out money for gas and routine oil changes, repair costs often surprise them. The average repair cost for a car made between 1996 and 2012 was $367.84, according to the 2013 CarMD Vehicle Health Index, though of course, some repairs cost significantly more. Wan McCormick, founder of Reliable Alliance Financial in Fairfax, Virg., says that $250 to $2,500 is a good amount to have saved each year for expenses related to unexpected car issues; if your car is older or prone to problems, you may want to save even more.