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Many don't have $2,000 for a rainy day

money.cnn.com

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Re: Many don't have $2,000 for a rainy day

#11

Post by ssharp »

I think it's very important to instill saving behaviors early on in your adult life. After graduating college, I had plenty of debt, but still made sure I was putting money into a savings account.

Technically, it would have been much wiser to put any excess money towards 15% APR credit card debt than in 5% saving accounts (5% savings accounts did exist for a few years prior to the 2008 collapse), but actually having money to pay for unexpected expenses rather than building the debt I was trying to pay off, felt better.

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Freakonomics did a podcast a few months ago, using either this study or a similar study as part of the podcast. The podcast was about lottery-linked savings accounts. The other half of the equation was that the same 50% of Americans who could not come up with $2,000, were also the ones most likely to play low-odds lottery games. Lottery-linked Savings accounts take the relatively minuscule interest gains on each account, and throws them into a lottery pool, where one or several winners will win the "prize".

This style of savings account worked very well in one country (I believe it was South Africa). The incentive to save, with minimal interest gains, was low. However, the idea of a big payday, which technically was free (you only surrender your interest), led many more people to put money away.

These bank accounts are largely illegal in the United States. Partially because of their image, and partially because states don't want to sacrifice their own state-owned lottery cash cows. I believe a credit union in Michigan was able to work around some laws and find a legal way to offer a lottery-backed savings account.

Re: Many don't have $2,000 for a rainy day

#12

Post by brg »

fr0sty wrote: post #8

I wonder whether or not there is a difference between the 'ability' and the 'perceived ability' to raise cash quickly. Many people are cash-poor, yes, but I am surprised that over half the population has no cash equivalents, hard assets, or access to credit (even from a relative or friend). N.B. This is not meant to be financial advice, but just to point out that people usually have many more options than they think…

That was my first thought as well. Outside of hard assets which could be liquidated without affecting ones future ability to earn; we also have that credit is still widely available, although the interest rates are higher than before. Short term loans from social channels are usually available, unless one has recently moved thousands of miles from their hometown.

Re: Many don't have $2,000 for a rainy day

#13

Post by robflynn »

artmageddon wrote: post #10
nkassis wrote: post #5

2,000 bucks is a lot, I know the rule of thumbs is like 3 months net salary to keep for bad days but that's just hard for people like most on HN that are young, trying to either bootstrap a business or have a ton of student debt. Not sure what I would do but I think I could sell enough non-essentials to make up the money if it was a really bad situation.

>I know the rule of thumbs is like 3 months net salary to keep for bad days I was under the impression that the rule was around 6 months.. then again, I'm talking about monthly expenses,as opposed to salary(which hopefully a person isn't spending 3 month's worth of salary in 3 months under normal circumstances). It probably goes up somewhat proportionally with age, if you factor in a home / dependents. I'm in the pro…

Six months salary is what I'd always aimed for. I managed that well until recently. Now it hurts.

Re: Many don't have $2,000 for a rainy day

#14

Post by chailatte »

fr0sty wrote: post #8

I wonder whether or not there is a difference between the 'ability' and the 'perceived ability' to raise cash quickly. Many people are cash-poor, yes, but I am surprised that over half the population has no cash equivalents, hard assets, or access to credit (even from a relative or friend). N.B. This is not meant to be financial advice, but just to point out that people usually have many more options than they think…

Most Americans have their assets stuck in their house and 401k and other toys.

House: It would take you 6 months to sell a house (good luck with all those foreclosures out there), 3 months to get a loan against your house (hard to get a loan these days).

401k: It would take you 1 month to withdraw from your 401k (if your 401k plan allows it).

Car/TV: There's an abundance of car/TV inventory out there, and it might take 2-3 months to move those.

Relatives: if half of Americans don't have $2000 for rainy day funds, chances are you're not gonna have much luck asking your relatives.

So realistically, if you needed $2000 tomorrow to bail out your family member (or $40k for that surgery tomorrow), it wold be very hard.

Re: Many don't have $2,000 for a rainy day

#15

Post by nkassis »

artmageddon wrote: post #10
nkassis wrote: post #5

2,000 bucks is a lot, I know the rule of thumbs is like 3 months net salary to keep for bad days but that's just hard for people like most on HN that are young, trying to either bootstrap a business or have a ton of student debt. Not sure what I would do but I think I could sell enough non-essentials to make up the money if it was a really bad situation.

>I know the rule of thumbs is like 3 months net salary to keep for bad days I was under the impression that the rule was around 6 months.. then again, I'm talking about monthly expenses,as opposed to salary(which hopefully a person isn't spending 3 month's worth of salary in 3 months under normal circumstances). It probably goes up somewhat proportionally with age, if you factor in a home / dependents. I'm in the pro…

That probably just proves that those "rules of thumb" were some random round number someone picked for TV ;p

Re: Many don't have $2,000 for a rainy day

#17

Post by arethuza »

One of the reasons the UK government bailed out the major banks here in the last financial crisis is that they feared what would happen if the retail banking system stopped working - if our chip-n-pin cards and ATMs suddenly stopped working.

I did wonder if it might be sensible to keep a chunk of cash somewhere safe for unpredictable times - having plenty of cash on tap won't help much if it is tied up in a bank that has just stopped working.

Re: Many don't have $2,000 for a rainy day

#18

Post by thomasgerbe »

nkassis wrote: post #5

2,000 bucks is a lot, I know the rule of thumbs is like 3 months net salary to keep for bad days but that's just hard for people like most on HN that are young, trying to either bootstrap a business or have a ton of student debt. Not sure what I would do but I think I could sell enough non-essentials to make up the money if it was a really bad situation.

I was paying rent in NY on a below average salary and still managed to save about 10k over a course of a few months to eventually quit and bootstrap. All it took was not going out excessively and not buying superfluous new things.

Re: Many don't have $2,000 for a rainy day

#19

Post by fr0sty »

chailatte wrote: post #14
fr0sty wrote: post #8

I wonder whether or not there is a difference between the 'ability' and the 'perceived ability' to raise cash quickly. Many people are cash-poor, yes, but I am surprised that over half the population has no cash equivalents, hard assets, or access to credit (even from a relative or friend). N.B. This is not meant to be financial advice, but just to point out that people usually have many more options than they think…

Most Americans have their assets stuck in their house and 401k and other toys. House: It would take you 6 months to sell a house (good luck with all those foreclosures out there), 3 months to get a loan against your house (hard to get a loan these days). 401k: It would take you 1 month to withdraw from your 401k (if your 401k plan allows it). Car/TV: There's an abundance of car/TV inventory out there, and it might ta…

The timeframe from the article was 30days. which make 401k or IRA funds available. If you can't sell your car in 30days you are not trying.

Also, most Brokers will allow you to borrow against the value of your IRA, or your 401k with very short notice. If you have a house and a mortgage you probably also qualify for an unsecured line of credit and could get a cash advance immediately.

The surgery example is a non sequitur because hospitals have very liberal payment terms and are willing to negotiate costs down significantly for people with financial hardships.

Re: Many don't have $2,000 for a rainy day

#20

Post by ydant »

ssharp wrote: post #11

I think it's very important to instill saving behaviors early on in your adult life. After graduating college, I had plenty of debt, but still made sure I was putting money into a savings account. Technically, it would have been much wiser to put any excess money towards 15% APR credit card debt than in 5% saving accounts (5% savings accounts did exist for a few years prior to the 2008 collapse), but actually having…

I find the idea behind the lottery linked savings account very interesting. In order to save others the trouble of looking for it (although it was a quick Google), I believe this is the podcast you were referring to.

http://www.freakonomics.com/2010/11/18/freakonomics-radio-co...

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