News Column

'Rainy Day' Savings Dry up in New Mexico

July 1, 2013

New Mexico's population is among the country's worst for having a stash of cash available for emergencies.

A new survey shows that 62.8 percent of New Mexicans reported not having enough "rainy day" savings to get through three months of "unanticipated financial emergencies." That's third worst in the United States.

The Land of Enchantment ranked behind only Mississippi and Indiana.

The figures come from the 2012 National Financial Capability Study undertaken by the FINRA Investor Education Foundation.

The study also found New Mexicans were more likely to pay just the minimum monthly payment on their credit-card bills (40 percent) than the national average (34 percent).

Also of note: 25 percent of New Mexicans had unpaid medical bills, right in line with the national rate of 26 percent.

"Nothing about New Mexico (results) really surprised me," said Vicki Van Horn, executive director of the New Mexico Project for Financial Literacy.

Income, banks, 'social capital'

There are several reasons New Mexicans might not have the kind of cushion they need to weather a financial emergency.

The state's lower income level is an obvious contributing factor. According to U.S. Census data, New Mexico's median household income ranks 42nd in the country, and is more than 12 percent less than the national median.

Saving can also be a challenge without the resources of a bank. According to a 2011 federal study, 11.5 percent of New Mexico's households operated without a checking or savings account at a mainstream bank or credit union -- the nation's fifth-highest rate. Another 23.6 percent were considered "underbanked."

"That being the case, you lose out on saving unless you have a really big mayonnaise jar you stick cash in and keep it under the mattress," said Ben Heyward, president and CEO of First Financial Credit Union, noting that many people have an inherent distrust of banking institutions while others -- especially in rural New Mexico -- have limited access.

Another problem is a lack of financial education, he said.

And there may be other, more cultural factors at play in New Mexico. Van Horn said New Mexicans without sufficient emergency savings are accustomed to relying on a network of family and friends when they find themselves in a bind.

"New Mexicans help each other out a lot, particularly extended families (that) do reach in to help family in one way or another," she said. "We may have more social capital than some of the (other) places where you could live."

Then there's just good, old-fashioned optimism: For those who've never experienced an abrupt job loss, divorce/separation or serious health issue, it can be hard to muster the motivation to save for one.

"When things are going well, we underestimate that bad things can happen even though for most people, if you look back a year, you can pinpoint a number of expenses you've had," Van Horn said.

Savings goals

So what kind of cash cache should you have?

Experts recommend socking away anywhere from three to six months' worth of living expenses.

For retirees and those with any kind of job instability, Albuquerque certified financial planner Stephen Madeyski said it's advisable to keep a year's worth of funds available.

Such a stockpile can help prevent many a financial pitfall, such as racking up credit-card debt or getting highinterest loans from payday lenders. And though more and more people have turned to their 401(k)s in a pinch, Madeyski warns that tapping those accounts is also problematic because it opens up the possibility for stiff penalties if the funds aren't repaid on time.

"It may make sense on one level, but you shouldn't rely on (401(k) funds)," he said.

Van Horn said she actually advises people to have two levels of emergency funds: One to cover the more mundane -- but still costly -- problems, and another to stay afloat for a few months in the event of a significant upheaval like a layoff or major illness.

The first level generally ranges from $1,000-$2,000 depending on the household risk factors, she said. A good rule of thumb is to tally all of last year's unexpected expenses -- the care of a sick pet, the purchase of a new hot-water heater, a major car repair -- and have that money at the ready.

"If you're just getting your financial life together, the first $1,000 you can put aside is really important," she said.

Heyward of First Financial Credit Union said New Mexicans' lack of savings is not necessarily a byproduct of the recession.

"It's been going on (longer than that)," he said. "Habits are hard to break. People think a habit is something you do, but it's not. Sometimes it's something you don't do. ... (Many New Mexicans have) survived so far without having a rainy-day account, and the habit tells them they don't need it."

The local experts have various tips for breaking the "non-saving" habit.

Medeyski urges an automatic drafting strategy. Arrange for the bank to move a pre-set amount of money from a checking to a savings account on a monthly basis.

It can always be transferred back, but Madeyski said making it slightly harder to reach makes it easier to forget and therefore save.

If current bills consume every last bit of your paycheck, reevaluate all expenses-- especially on the nonessentials like cable TV, gym memberships, daily lattes. Building an emergency savings is important enough to warrant certain lifestyle cutbacks, Madeyski said.

"It really should (be a priority); you need to get that cushion," he said.

Van Horn said she encourages any savings strategy that works. She relates the story of a grandma who grew tired of being treated like a bank, so she instituted a plan that required every member of the family to give her $20 per week. The members then took turns getting the pot.

For others, the answer may be as simple as setting aside pocket change every day, Van Horn said.

Despite the importance of building an adequate rainy-day savings, Madeyski said it's important to have a figure in mind but not to feel overwhelmed by it.

"Half a month, one month -- anything is better than nothing," he said. "For someone who doesn't have an emergency fund, a great goal is to start somewhere. The most difficult thing is to start."


(c)2013 the Albuquerque Journal (Albuquerque, N.M.)

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Source: Copyright Albuquerque Journal (NM) 2013

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