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The Best Way to Stress Less About Money

Protect yourself against life's inevitable financial shocks — before they happen

By Diane Harris

(This column marks the debut of a bimonthly Next Avenue column on financial wellness by former Money magazine editor-in-chief Diane Harris. It will offer insights and advice to help you take the stress out of managing your money and improve your fiscal health.)

Financial Shocks
Credit: Adobe Stock

Money is the top cause of stress in the U.S., the American Psychological Association reports, and the leading driver of stress in the workplace, according to studies by the National Business Group on Health, Aon Hewitt, PwC and others. The most common cause of all that anxiety? The feeling that you’re just one financial shock away from disaster.

Why Financial Shocks Are So Common

Financial shocks are shockingly common and, according to the federal Consumer Financial Protection Bureau, the capacity to absorb a financial shock is a key pillar of financial wellness.

Roughly two-thirds of U.S. households experience a cut in pay, a health crisis, a layoff or other life event that adversely affects their finances over a typical five-year period, a Pew survey found. Every year, six in 10 people get hit by one of these events or a substantial, unexpected expense such as a leaky roof that needs fixing or emergency car repairs. More than half the survey’s respondents said the financial shock made it hard for them to make ends meet.

Why Financial Shocks Are So Painful

The main reason financial shocks can be so devastating is because relatively few people have enough cash tucked away. A Bankrate survey last year found that 63 percent of Americans don’t have enough in savings to comfortably handle a $500 car repair or a $1,000 emergency room bill — including nearly half of those who earn $75,000 or more.

Without enough cash to foot the bill, people often turn to credit cards or tap retirement accounts. In a 2017 PwC survey, one in five boomers said they’d had to withdraw money from their plans before retirement and a third anticipated having to do so in the future, most commonly to help manage an unexpected expense.

What, Me Worry?

As the table below shows, despite more years to save, older workers are nearly as anxious about not having a financial cushion as younger ones. When needed, they often tap retirement accounts to cover the shortfall — which doesn’t help their second most common financial concern.

Note: respondents could choose two answers. Source: PwC Employee Financial Wellness Survey 2017

3 Steps to Stress Less About Money

That’s why the most important thing you can do to improve your financial health is devising a plan that will help you manage the shocks when they arrive.

“The ability and willingness to plan and save for a financial shock is the most predictive attribute of an individual’s financial health, even after income and other demographic variables are held constant,” notes Laura Cummings in a report from the CSFI/JP Morgan Chase Financial Solutions Lab.

Of course, you probably already know you should have an emergency fund —the equivalent of three to six months of living expenses in a safe account you can get into quickly and easily. Next Avenue recently offered 10 smart ideas to build an emergency fund.

The critical missing piece: Getting yourself to actually do it.

How do you turn good intentions into action? I suggest taking these three steps:

1. Make a commitment. Open a new savings account whose sole purpose is to be your emergency fund. Name it something like, “Rainy Day Fund.”

This leverages a behavioral finance principle known as mental accounting: We tend to think of our money in buckets and are less likely to tap an account formally designated for a specific goal.


“If [the money] is not tagged for something, we consider it open hunting season and are more willing to spend it freely,” noted Kristen Berman, co-founder of Duke University’s Common Cents Lab, in a report for the MetLife Foundation.

Once you’ve opened the account, decide how much you’re going to save and how frequently — say, $50 or $100 whenever you’re paid. Behavioral economists call this pre-commitment: Making a pledge to take a particular action with your money makes it more likely you’ll follow through. “Instead of relying on ourselves to be great people, we make it harder for our future self to mess up,” Berman wrote.

In an experiment last year, Wendy de la Rosa, who co-founded the Common Cents lab with Berman and behavioral economist and bestselling author Dan Ariely, relied on pre-commitment to help people almost double the amount of their tax refunds they saved. Users of the savings app Digit were asked by text message how much of their refund they wanted to set aside, sometimes after the funds had been deposited in their bank accounts and sometimes before they received the money. Users who committed to the goal before getting their refund saved 22 percent of it, vs. just 12 percent for those who pledged to save after they received the money.

2. Make it easy on yourself. Inertia is the enemy of savers. Behavioral economists have found that people are often entangled in the demands of everyday life, so they get sidetracked by small hassles. As a result, they prioritize current needs over saving for the future.

The solution: Take good intentions out of the equation and automate the process, so you won’t have to think about saving for that proverbial rainy day after a one-time set-up. It’s a technique that’s been used with great success in the 401(k) world, where a growing number of companies now default employees into their plans and automatically bump up their contributions every year. Employers who use these default settings have seen participation and savings rates rise dramatically.

To put your emergency savings on automatic, you could fill out a one-page form at your bank agreeing to transfer a set amount into your account at regular intervals — say, whenever you get paid. Or you could sign up at work to split direct deposit of your paycheck between your checking account and emergency fund.

Psychologically, it’s easier to save money you’ve never had in your account to spend, and you’ll naturally adjust your budget to accommodate.

3. Plan for the ‘What-Ifs.’ Give some thought to how you would manage if a financial shock hit — say, you were laid off or you and your partner split or one of you became ill. Having considered the financial ramifications in advance, even vaguely, will prove useful and maybe even comforting if the event comes to pass, at a time when your emotions will be running high.

An advance plan may also motivate you to save more and stress less.

In a 2017 survey by the American Savings Education Council and the Consumer Federation of America, 82 percent of respondents with a financial plan in place felt they had an ample emergency fund, compared to 52 percent of those who didn’t.

Personally, I think a lot about what-ifs.

I’ve been married for nearly 30 years and love my husband more than the day I met him, but I’ve still given some thought to where I’d live if we got a divorce, how we’d then divvy our assets and how I’d manage in terms of income. (Sorry, honey.) I’ve done the same mental exercise in case either of us becomes ill or dies.

And for years, I thought about what I’d do next professionally if my job as a magazine editor was eliminated, which, given the turmoil in the media industry, seemed a fair bet. When it came time to activate my plan earlier this year, I was not just ready, but excited for my next act. That's the power of a good Plan B.

Diane Harris is an award-winning financial journalist and financial wellness advocate. She is the former editor-in-chief of Money magazine, the first woman to hold the top job, and covered virtually every aspect of personal finance during her 22 years there. She is writing a book on financial wellness and launching a related coaching and consulting business. Follow her on Twitter @dianeharris. Read More
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