High inflation and interest rates have made it hard for people of all ages to build up emergency funds, but Gen Z seems to be having a particularly difficult time stashing away cash, a recent Bank of America survey found.
In fact, 56% of Gen Zers say they don’t have enough savings to cover three months of expenses in the event of an emergency. They’re also the most likely out of any generation to regret not saving enough for emergencies, according to Bankrate.
Given that emergency funds tend to grow as people get older and wealthier, Gen Z’s lack of savings doesn’t come as a shock to Douglas Boneparth, certified financial planner and president of Bone Fide Wealth. But this doesn’t mean that younger generations should procrastinate when it comes to starting an emergency fund.
“When we’re young, we generally think we’re invincible,” Boneparth tells CNBC Make It. “But there is always stuff that comes up, whether it’s underemployment, gaps in employment, emergency medical expenses.”
Saving might not be at the forefront of young peoples’ minds, but you’ll thank yourself later on — not only does an emergency fund provide a stable financial foundation, it also allows you to accept unexpected opportunities without taking on debt.
Here are the basics of an emergency fund and why it’s important for Gen Z to begin stashing away cash now.
What is an emergency fund and why should Gen Z care?
While many financial experts recommend that an emergency fund contain three to six months of your living expenses, Boneparth prefers to be more conservative: He recommends socking away six to nine months of your living expenses.
Having an emergency fund doesn’t just mean you’ll be better prepared to weather unexpected crises like a medical emergency. It can also help you accept important opportunities without having to take on debt, Boneparth adds, like a once-in-a-lifetime vacation or an interesting business opportunity.
“When we’re young, we want to be focused and we want to be able to seek out those opportunities in our life and career,” he says. “And having financial stability allows for that.”
The first step to building an emergency fund
While it can seem daunting to begin saving money at an age where many would rather spend it socializing or traveling, the first step Boneparth recommends to start an emergency fund isn’t complicated and doesn’t even involve saving just yet: “Master cash flow.”
“Go back over the last three, six, even nine to 12 months and see how you’re actually spending your money relative to what you’re earning,” he says. “Becoming extremely familiar, if not intimate, with how money comes in and out of your life is the No. 1 priority.”
If you determine that your living expenses are $4,000 each month and you make $5,000 in that same time period, figure out if you can begin consistently saving that $1,000.
By developing consistent savings, you can build a strong financial base that can weather a variety of unexpected costs. In the end, Boneparth says it all comes down to spending behavior.
“The hardest part of personal finance is striking the balance between spending and saving, between lifestyle and consistent savings,” he says. “This is such a big part of having a solid financial foundation and it really just sets you up for success across the board.”