Coronavirus | How to build an emergency fund in the middle of an emergency

The coronavirus is rapidly slowing the US economy and disrupting jobs. If you don’t have a rainy-day fund already, it’s time to set aside whatever cash you can.

Most people think of an emergency fund as something saved gradually, over time. But the crisis is here now for many people — or soon will be, in the coming weeks — so a different approach is needed.

“It’s hard to save a lot of money quickly on a modest income,” said Stephen Brobeck, Senior Fellow with the Consumer Federation of America. And compared with the last downturn, he said, the current economy has many more people in ‘gig’ or freelance workers, who generally aren’t eligible for unemployment benefits and whose fluctuating income makes it hard to save.

Cash assistance may be coming from the federal government as part of its response to the virus outbreak, but details are uncertain. So making a plan on your own is wise.

“The answer can’t be to do nothing,” said John Thompson, Chief Programme Officer of the Financial Health Network, a non-profit focused on financial innovation.

One reason for hope: Even small cash cushions can help people stave off disaster. As little as $250 can significantly reduce the risk that a family will miss paying a utility bill or be evicted, research suggests.

“Each extra dollar saved” reduces the likelihood of having to skip bill payments, said Mariel Beasley, a co-founder of Common Cents Lab, a financial research group at Duke University.

Americans’ lack of emergency savings is a longtime worry, even during the strong economy of the past few years. Numerous surveys by the Federal Reserve have found that many households would struggle to handle an unexpected $400 expense.

So what to do?

First, try to get a handle on your income, Thompson said. Employers often use computer systems to schedule shifts weeks in advance, so try to find out if your hours will be cut so you can estimate how much of a shortage you’re facing.

Next, take stock of possible sources of cash and credit. It’s not advisable to open new credit card accounts, but knowing the credit limit on each card already in your wallet can help you get an idea of what you can draw on if needed, Thompson said.

If you are expecting any sort of lump sum — whether a bonus or a commission, or an income tax refund — set aside as much of it as you can. Many Americans are now receiving tax refunds, and the amounts can be substantial, in part because of the earned-income tax credit, which particularly benefits families with children.

Among families getting a refund, the average is more than $3,000, or the equivalent of nearly six weeks of take-home pay, according to a study of millions of customer accounts by the JPMorgan Chase Institute, the research arm of the big bank. (The study looked at data from 2015, 2016 and 2017. According to IRS statistics, the average refund as of March 5 was $3,012).

That could help provide a financial lifeline for the difficult weeks ahead — but it isn’t a panacea, Thompson said.

That’s because many people have earmarked their refunds for specific expenditures, like paying down credit card debt or buying household items.

“For many people, the money is already spent,” he said.

Still, families getting tax refunds had, on average, more than a quarter of their refunds remaining six months after receiving them, the Chase research found.

“A few hundred dollars can make a substantial difference,” Thompson said.

Next, scrutinise spending, and cut where you can. It may feel harsh, but belt tightening is the idea. Can you postpone a (no doubt much-anticipated) spring trip? Are there subscriptions you can do without temporarily? (Many publications are offering online coronavirus coverage free of charge.) Can you switch to a less expensive cellphone plan for a few months?

“Take a really aggressive approach,” Beasley said, and direct all the savings to your emergency fund.

Depending on your circumstances, you may consider temporarily reducing contributions to your retirement account and redirecting the money to an emergency fund. It’s common for people to contribute to workplace accounts like 401(k) plans yet lack emergency savings, Beasley said. That’s because many employers automatically enroll workers in retirement contributions from their paycheck.

In general, it’s wise to keep contributing to retirement plans regularly, because your money is buying more shares when prices are low. But if your situation is dire, a cut is better than stopping entirely. Beasley said one option might be to suspend contributions above any match from your employer; that way, you’re still saving for your long-term retirement. Just make sure — set a calendar reminder on your phone, perhaps — to resume contributions once the crisis passes.

While it might not be something you have considered in the past, she said, now is a good time to identify local food banks, or investigate how to apply for government food benefits, like the Supplemental Nutrition Assistance Program (SNAP) and the Supplemental Nutrition Program for Women, Infants and Children (WIC).

If you own a home, you could consider opening a home equity line of credit as a financial backstop. The loans let you draw on your home equity — the difference between the value of your home and any mortgage you already have. At the end of 2019, nearly 45 million homeowners with mortgages had ‘tappable’ home equity, $119,000 on average, according to the research firm Black Knight.

Lines of credit generally carry lower interest rates than credit cards. However, the loans are secured by your home, which means you risk foreclosure if you miss payments. For that reason, Beasley said, people should be cautious about using home equity.

Once you have a savings cushion, don’t feel bad about using the money if you need it — that’s what it’s for. An emergency fund is different from retirement savings, which are meant to grow over a long period. Rainy-day accounts are meant to be drawn down and replenished so you can use them again.

“You’re not saving to create an account you never touch,” Thompson said.

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Here are some questions and answers about emergency savings:

A: Some employers have begun offering workers the option to save for emergencies via payroll deduction, but the programmes aren’t yet widespread. Some employers offer one-time “hardship” grants to workers who face an unexpected financial setback; amounts vary, but a maximum of $2,500 is common. Often, the programmes are geared toward helping people during natural disasters, like hurricanes. Now many are adapting to help workers affected by the coronavirus, said Doug Stockham, President of the Emergency Assistance Foundation, which manages hardship funds for employers.

Workers who can’t go to work because of the virus — perhaps because they have to stay home with children or a sick member of their family — should check with their human resources department to see if grants are available and how to apply, Stockham said.

A: The main point of an emergency cushion isn’t to earn big returns; it’s to have a reserve to cover necessary costs, until things — hopefully — turn around. Some credit unions, including Affinity in Basking Ridge, New Jersey, and Canvas in Englewood, Colorado, offer “reverse tier” savings accounts, which pay higher interest rates on low balances to encourage saving. (Most banks offer higher rates on bigger balances, to attract deposits.) At Affinity, for example, you can earn 2% on balances below $2,500.

A: Many companies allow hardship withdrawals or loans from 401(k) retirement plans, but doing so puts your long-term retirement savings at risk. Hardship withdrawals don’t have to be paid back but are taxable as income and may result in penalties. Loans aren’t taxable but must be repaid, and they can be risky because if you leave your employer you generally have to repay the loan quickly, said J. Michael Collins, director of the Center for Financial Security at the University of Wisconsin-Madison.