The Primary Cause for Financial Struggles: Why Most Individuals Lack Savings and Emergency Funds

You’ve probably read other articles about the importance to build your savings and have an emergency fund.

It could be an unexpected medical bill or a breakdown in your vehicle.

I don’t like the term “emergency funds” because you should build up your savings for retirement, investments, etc.

What ever the case, it is clear that most Americans will be in a bad situation if a costly issue arises.

Due to a lack in preparation, people often end up racking up debt on their credit cards to cover the cost or receive a lot of late notices and extra fees, resulting in a pile of bills.

What’s worse is that the group of people aged 35 and younger have not saved anything. It could be for a retirement fund or an emergency fund.

They used data from the Federal Reserve Survey of Consumer Finances to break down the savings rates into different categories in a Business Insider piece.

The average balance of the savings accounts by age was not very impressive.

Average Savings Account Balance by Age
The median savings account balance was also broken down by income.

Median savings account balances by income
It is understandable that higher earners can save more and as people age, they have more money because time is on their side.

For the group of 35-year-olds, it makes sense to have low saving levels for several reasons: paying off student loans, developing their career, or perhaps still attending school.

These are only a few examples.

We also know that people with low-incomes can accumulate huge savings or retirement fortunes. So, a lack in income isn’t necessarily the primary cause.

Table of Contents
Why do people struggle to save money?
Myths about living within your means
What can you do to start living below your means?
Why do people struggle to save money?
I want to start by saying that I understand it’s tough out there. Job loss, rising student debts, stagnant wages… Everybody has their own unique situation but most would benefit financially if they took this one step. What is it?

Don’t live above your means

In theory, it’s an easy concept to grasp. However, in practice people can find it difficult. It’s a major problem that many people face, and they may not even be aware of it.

Living below your means can be defined as: spending less than what you earn and making wise purchases, without having to live from paycheck to paycheck.

You can do this by downgrading your vehicle, moving into a more affordable apartment or home, and not eating out every day.

It is also known as “keeping up with the Joneses.”

We worry about what other people have: expensive jewelry, fancy cars, large houses, new clothes etc. We are constantly upgrading and buying our own things, whether we intend to or not.

It is fine to treat yourself occasionally, but not every time.

Treat yo self
Before I really got into personal finance, I struggled to live below my means.

I bought a car when I started my first job and stayed in a small apartment I couldn’t afford. All of this wasn’t to show off or to brag. It was me wanting to become independent.

I made impulsive decisions and made the wrong financial choices.

Myths about living within your means
A big misconception about living below your income is that you must be cheap and frugal. Or that you must live a minimalist lifestyle.

This is false.

It is possible to enjoy yourself and not have to worry about paying bills or having money in an emergency.

This is not only stressful, but also bad for your wallet and your health.

This is also largely based on how you perceive yourself from the perspective of others.

You’re friend, for instance, gets a new car. You don’t want them to think you are behind the times or that you have been driving the same car for 10 years.

Often, these are people who do not live within their means. They may not have any savings or be struggling financially. Don’t be worried about how other people perceive you. Be confident with your finances.

The Millionaire Next Door by Thomas J. Stanley & William D. Danko is a great book which talks about this. It’s also one of my favorites.

The authors explain how you would never know that there are many millionaires because they do not act as if they have money or can afford to spend more. Recommended.

What can you do to start living below your means?
You may find it difficult to identify your financial mistakes, but you can do so much easier than you imagine. It is time to face the facts.

Here are some tips to help you live within your means.

Spend less money
Make a list now of everything you buy frequently. Take a look at the list to see which items are essential and which ones don’t really improve your life.

Why not watch TV? You can cancel cable and switch to a cheaper alternative like Netflix. Are you going out to eat several times per week? Reduce your eating out to just once a week, or even once a monthly.

We don’t always realize how much we spend on things that we wouldn’t really miss if they weren’t there.

I have cut down on my cable subscription, reduced the number of restaurants that I frequent, and seldom buy anything new. Once it was gone, it wasn’t something I missed and it was much easier to avoid getting back into it. Trim can help you find and negotiate unwanted subscriptions.

Refinance your loan to pay less interest
The rising and burdensome interest rates on student loan are a big killer for millennials and younger generations. This can also be applied to other loans, such as a credit card or a car loan.

Consider refinancing your student loans if you are paying high interest rates. Credible offers a wide range of options.

You can compare the rates of prequalified student loans refinancing from different lenders using Credible without having to affect your credit score. 100% free! Start here.

If you already have a credit card with a high interest rate and you have good credit, you may be eligible for a credit card that allows you to transfer your balance at no interest for a certain period.

Be sure to read the fine print and be aware of any transfer fees. This can make you feel a little more at ease.

Smart home and car buying
We all want a nice, spacious home or a car we know is free of problems and accidents. You know what? It’s also killing you financially.

Avoid buying the house that the bank claims you can afford. They are happy to lend you money and will charge you interest. Don’t forget about taxes, insurance and HOA fees.

A pricey house can also be a nightmare if you are unemployed or face an unexpected expense.

You shouldn’t buy the most expensive house you can afford. Instead, choose one with a little cushion. You can still fix up the house, even if some of its features need updating.

The same applies to buying a vehicle. As soon as you drive off the lot, a brand-new car starts to depreciate.

The value of a car can drop by up to 30% the first year you own it. Yikes!

Guess who made this mistake just a few short months after he started his first job as a big boy after graduating from college? Yup, me.

It was a good deal, and the interest rate wasn’t too bad, but when you add it to my $400+ per month in student loans, I think that was a poor choice. The lesson learned.

It is fine to buy a new vehicle if you can afford it. Even then, does it make sense to lose almost 30% of its value in just one year?

You can buy a certified pre-owned car to make sure it’s not a lemon.

First, pay yourself
Most of us pay bills and expenses first. We then save the rest.

It’s the best thing to do, otherwise you could accrue late fees or receive bills from claims. Nobody wants to be in that situation.

What happens the majority of the time, though? There is very little left to save after paying bills, spending money, and using the rest for other things.

If we are aware of the money in our checking account, we may decide to use it for extra purchases and then move the money to savings.

You should instead reverse your mentality.

When you receive a paycheck, you should immediately transfer a certain amount into your savings account. This money will never be touched. You won’t have money in your checking account to spend, and you can budget for your bills better.

You can also use this to boost your savings. I was able to invest and save in just a few short years by adopting the pay yourself first mentality.

What do you do to save money and live within your means?