Could you cover $400 expense?

Along with maintaining a good credit score, saving money for unexpected expenses is one of the most important personal finance steps a person can take.

Unfortunately, that’s something that nearly half of those in the U.S. apparently have not done.

The newly released Federal Reserve report on the “Economic Well-Being of U.S. Households in 2014” contains findings that illustrate the financial insecurity of too many of our nation’s households.

Sure, the study does show that, compared to the prior year, people surveyed in 2014 were more likely to report their families were “doing OK” or “living comfortably,” and those who expected to have more income than in the previous year increased to 29 percent.

That’s good, but here’s the disconnect. While nearly two-thirds of those surveyed thought they were at least “doing OK” the report also says: “Forty-seven percent of respondents say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing.”

That sounds pretty grim. For households with incomes of $40,000 or less, two-thirds said they couldn’t cover a $400 expense out-of-pocket.

I would respectfully suggest that being unable to pay an unexpected expense of no more than $400 puts one in the “just getting by” category (another choice offered in the survey). A set of tires, a broken home appliance, or a speeding ticket would be enough to tip lots of households into a scramble for funds.

Generally, it’s suggested that having enough money in an emergency fund to cover at least three months of expenses is a prudent goal. Without savings, what does a person do next? Maybe borrow money. Then, with interest charges, they owe more than before.

I would guess that one reason so many people reported that they were both “doing OK” but also unable to handle a $400 expense without borrowing is that they were already carrying credit-card balances they were trying to pay off. In that situation, it would make sense to devote savings to paying off high-interest debt, rather than putting it in a savings account to earn nearly no interest. And unexpected expenses would go on the credit card, in that situation.

Lots of people are still struggling with the effects of the Great Recession, and wages have been stagnant for years. Saving money isn’t easy for people with limited incomes, and keeping it in the bank is hard, because “unexpected” expenses happen with surprising regularity.

I remember well how tough it was to save when I was a young magazine editor in the late 1980s earning embarrassingly low pay. I tried to build my savings up, and took a second job waiting tables, but something like a routine car repair would easily wipe out most of what I had saved.

But the alternative to saving is a sure path to a harder financial future. Those without savings, particularly if they have bad credit, will end up paying more for things because they will have to borrow, and the costs of borrowing will make it even harder to set money aside. And if they don’t handle the resulting debt well, such as by paying late or not at all, their damaged credit will make it harder and more expensive to buy a car, or a house, or even to rent an apartment. (Yes, landlords check credit scores).

People who live within their means — about 80 percent said they do, in the Fed survey — and manage to create some savings for emergencies will have less financial stress, less need to borrow. They can avoid paying credit-card interest, as the majority of those in the Fed report do, and would likely have better credit scores, which lead to lower payments on loans.

There are many strategies for savings, and people need to find the one that fits them best, whether that’s physically putting a few dollars aside every day or using a software program or app that transfers money into savings.

If credit cards lead you into debt, don’t use them. If you always pay card balances on time and in full, benefiting from cash-back benefits and sign-up bonuses, then credit cards can help you financially.

Be realistic. Many “unexpected” expenses can be anticipated. Old cars and appliances break. Electric bills rise in the summer. Plan ahead and avoid a scramble.

Spending less to save more is common sense, but the Fed survey makes clear that many people have already cut expenses to the bone. “Thirty-one percent of respondents report going without some form of medical care ... because they could not afford it.”

The flip-side to spending less is earning more, and lots of people would like to work more, says the Fed survey.