Three-Fourths of America Lives Paycheck-to-Paycheck

76 percent of Americans are living paycheck-to-paycheck, with little or no emergency savings, according to a new poll by Bankrate.com.

According to the survey of 1,000 adults, less than one-in-four Americans has enough money in his or her savings account to cover six months of expenses, the recommended minimum from planning and personal finance experts.

“It’s disappointing,” said Greg McBride, Bankrate.com’s senior financial analyst. “Nothing helps you sleep better at night than knowing you have money tucked away for unplanned expenses.”

Even though a larger percentage of consumers report an improvement in their financial position, the survey found that the amount of money in savings accounts has not changed much over the last three years.

This situation is dangerous for consumers, because it places them at risk of losing their home or pushing them into bankruptcy if an unexpected and large expense arrives.  A serious illness or injury, or a layoff is all it would take to send many Americans into serious financial trouble.  And once the downward financial spiral begins, it’s very difficult to catch up unless there is some form of debt forgiveness available.

Personal finance experts have long stressed the importance of living within your means, but in today’s low-growth economy and anemic job market, that’s becoming harder and harder for average Americans.  The fact that so many are struggling to make ends meet is no surprise, but the extent of the problem is surprising – even to professionals in the personal finance field.

How much should you have in your savings accounts before you venture into the world of stock market investing? As a general rule of thumb, you should have a cushion of at least three months living expenses tucked away in a safe savings vehicle, such as a money market fund or bank savings account. That’s step one. Step two is to make sure you are able to pay off your credit card debt before you start investing any excess savings you have accumulated. It makes little sense to invest in the market and get a return of 10%, while you are carrying credit card debt that costs you 18% or more. So pay off your credit cards first (or at least reduce your balances to a manageable level).

Step three is to start investing your excess savings on a regular basis. Brokerage firms like Schwab, Fidelity, and Vanguard all have low minimum requirements for investors who are just starting out. You can invest as little as $500. Once you open your account, set up an automatic payroll deduction plan that pulls money from your paycheck and deposits it into your investment account each month.

Step four is to increase the percentage of your payroll deduction every time you get a raise. If you started out with a 5% contribution to your investment account, increase it to 6% or 7% the next time you get a raise. You won’t notice the increased deduction because your paycheck will be bigger than it was before. This is a head game, I know,  but it happens to be very effective. I know this because I’ve been doing it with my clients since 1985.

Investing is as much about psychology as it is about numbers. If you can get started with just $500, and set up an automatic payroll deduction plan to add to your account each month, you will be well on your way to achieving what all investors want – financial security and independence.