Christine Benz: Hi, I’m Christine Benz for Morningstar. The pandemic and its associated economic effects have revealed, once again, how many households operate without any kind of financial cushion. Michelle Singletary joins me in discussing where to turn for money in a crisis. She is a Washington post journalist. And she’s also the author of a new book called, What to do with your money in a crisis. Michelle, thank you very much for being here.
Michelle Singletary: I am so happy to be here. Thank you for hosting me.
Benz: Well, it’s nice to have you here. Michelle, you talk about this in the book about how many people are operating without any kind of cash cushion, their budgets are very tight. And a lot of people just have a hard time raising some kind of emergency fund. Can you explain why it is such a struggle? It may be a bit obvious. But maybe you can tell us why people have a hard time raising an emergency fund.
Singular: No, think it’s not something we think we inherently know, because those of us who are doing well, you would like to think that everyone did things the way you did. And the point is, a lot of people couldn’t build that cushion because they just weren’t earning enough. Now you can say it was because of the decisions they made. But right now, when there’s a crisis, it’s not the time to point fingers at people. Now is the time to help them and then show them a better way, which is what I hope to do in the book, what I try to do in my column, right? I make a fuss, but not in a way that makes people who haven’t saved up and don’t have money for emergencies feel bad about themselves, they already know the things they don’t. have not done. And that’s why it’s important that we empathize with people who have less.
And the pandemic has shown, as many economic downturns always show, how vulnerable so many Americans are. And a lot of times, it’s not their fault. They have worked hard, but their wages are stagnant, they have not had a raise, housing is insane in so many parts of the country. So when you spend a large chunk of your income on housing and health care, you don’t have much left to save. And that is really the problem. It’s not because people decide to buy big screen TVs all the time. It’s just that they don’t earn a lot. Housing is expensive. Transportation is expensive. And health care is expensive.
Benz: Absoutely. For people who want to set aside emergency reserves to protect against unexpected job loss or big health care bills or whatever, what do you think is a big enough cushion? Do you often hear about this kind of living expenses of three to six months? I think that puts off some people, because it seems like a pretty big change. So how do people resize this cash cushion?
Singular: I like to think about it in stages. When you’re just starting out and you’re not earning much or your income is depressed, you’re saving everything you can. I know you’ve been hearing this for three to six months, and it should be a goal. But if you live from paycheck to paycheck, that’s not realistic. So what happens is people think it’s unrealistic, and they don’t do anything. You have to do something. Look, $ 25 will help you with your groceries, won’t it? You can get eggs and milk and make sandwiches. So every paycheque, if it’s $ 5, if that’s all you can cash, make it $ 5. And then the next paycheck, see if you can reduce it to $ 10, and so on. And so when you’re on a paycheck or don’t have much, I say at least give it a try. Try for at least a month or even half a month. And that’s a very achievable goal. At any level whatsoever.
And then if you’re good enough – you live from paycheck to paycheck, but you don’t have to live from paycheck to paycheck, you’re just spending too much – then you try to go for it for a while. three to six months, and just start one month at a time. And if you’re very in debt, it’s going to take you longer because I want you to put in more money to get out of debt. And so if you’re kind of, you know, in that middle zone, you want to shoot for three to six months, because that’s about the time it takes you to get a new job. If you’re a highly paid person – and a lot of people like that during the pandemic lost their jobs – you should aim for 12 months, 12 to 18 in fact, because studies show that during the last Great Recession, that is. the time it took for people who are highly paid to find another job at the same income level. So you can get a job but not at the same level of income. And if you have it so you can put it aside, then you should be aiming for the moon and be at least 12 months old. So just decide, “Where am I and how much can I withdraw to save for a pillow?” Because you need to have some kind of cushion no matter where you fall in the income spectrum.
Benz: One thing you touched on in the book was where to turn if you’ve run out of cash reserves, if you’ve spent them due to some sort of financial emergency or job loss. What sort of reserves the next line is? Can you explain the less bad choices to us? If I have, say, maybe retirement accounts? Or maybe I have a health savings account? What kind of hierarchy should be for me in this situation?
Singular: Obviously an emergency fund, if you have it, I hope. So you go through it, that’s what you kept it for. And then, you know, it hurts me to say that, but I’m a realist. If there is no other source of money and you have to do what you have to do, then you use your retirement account if you have to. If you have a Roth it’s much easier to tap that, your 401 (k) or TSP. And then here’s what you do: if you have to mine it, just take out what you need in the short term, because I’ve heard people say, “Well, I’m going to take it out for three or four. month. Maybe they feel like it’s easier to do it. But the way things are organized now, it is very easy to come back if you need more money. So just take out what you need as you go, maybe even a month to a month. It’s a little more paperwork, and so on. But I don’t want you to take more than you need and then have to pay taxes on it. And if you’re under 59 1/2, you have to pay that 10% penalty. And so this is the pot of money.
And then after that, OK, maybe you need to put some things on a credit card. I understand, I understand. The last thing that should be – and I really hope you ask everyone and their mom – are payday loans, auto title loans, any of those types of borrowing because it puts you in a cycle of debt. And you basically promise your next paycheck, if it’s a payday loan. If it’s your car, you install your car. And I’ve seen studies where people buy a paid car and owe maybe a few thousand dollars, but the car is worth 10 or 15, and they lose the car. So stay away from those. This should be the last, I mean, not even the last resort. I hate to even mention it, please don’t go if you can.
And really, even between the emergency fund and the retirement fund, ask people. People kind of think people always have their hands up. But it is very difficult to ask people for help. But I’d rather you do this before you dip into your retirement fund, because you’d be surprised how many people would be willing to help. So maybe aunt can help you with your utility payment, maybe grandma can help you with your car payment. You just have to contact them and say, “Look, I lost my job. It is really difficult. Could you help me for a few months? And if you receive this request, say yes. If you can afford it with your extra, give with your extra. And then pay people directly. We helped my sister, who lost her job due to the pandemic. And my husband and I paid his rent for a few months. We called the rental desk and checked what the amount was, checked how we could pay it. Not that I don’t trust my sister. But it is the prudent thing to make sure that the money is used for what you intended it to be used for. So pay the electricity company directly. Say, “Hey, what’s your bill? What number can I call? And you call them up and make the payment and that way you don’t give it to the person, but you give them relief as well.
Benz: This is good advice. I wanted to know what you think about home equity, the use of home equity. We have seen house prices rise, as you mentioned. How should people approach this? We have seen people get into a lot of trouble by overusing their home equity. This undoubtedly led to the last financial crisis. How does it fit in?
Singular: I think it’s a bit near the end of the line. And a lot of times, if you’ve already set up the line of credit that you can get, but if you’ve lost your job, that obviously won’t happen. I think of home equity as a jar of money of last resort. When people ask me I say the only thing you should really use it for is if you have a major home repair that if you don’t will damage your home. For example, if you have a major roof problem, I need you to fix your roof as it will create more problems. And if this is the only pot of money you can dip into, I’d rather you draw from it than from your retirement account, right? Because then you got, you know, taxes and so forth. So it’s kind of stuck between retirement and savings, and certainly credit card debt. But generally I think of home equity like, you know, don’t touch it unless it’s a serious emergency to maintain your home.
Benz: All right, Michele. It’s great to have your point of view. Congratulations on the book. And thank you very much for being here.
Singular: Thank you.
Benz: Thank you for watching. I’m Christine Benz for Morningstar.