Ivana Pino
·6 min read
When unexpected expenses crop up, having a safety net to catch you when you fall can help minimize the financial fallout. But in a struggling economy, Americans’ emergency savings are taking a hit.
According to Bankrate’s Annual Emergency Fund Report, 68% of people are worried they wouldn’t be able to cover their living expenses for just one month if they lost their primary source of income. And when push comes to shove, the majority (57%) of U.S. adults are currently unable to afford a $1,000 emergency expense.
When broken down by generation, Gen Zers (85%) and millennials (79%) are more likely to be worried about covering an emergency expense.
Why are Americans saving less?
There are a few reasons Americans are putting less away in their emergency funds.
The top reason cited by respondents (74%) was inflation. Rising costs have put added pressure on the average American’s wallet, and while the inflation rate is beginning to cool, it still stands at 6.5% for the 12 months ending in December 2022—significantly higher than the 2% rate that economists say is needed to keep the economy running smoothly.
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Other reasons for pulling back on saving included rising interest rates (68%). In 2022, the Fed raised interest rates a total of seven times in an effort to tame inflation. While the Federal Funds rate doesn’t directly impact consumers, it does eventually trickle down to consumers by influencing interest rates on consumer products like credit cards, mortgages, home equity loans, and student loans, as well as yields on savings products like high-yield savings accounts, certificate of deposits (CD), and more.
Over 40% of respondents cited changes in employment or income as a reason for pulling back on saving. The most recent unemployment report shows that the unemployment rate edged down to 3.5% in December 2022, but rising costs have still prompted mass layoffs, even among major companies.
More Americans are leaning on credit
So how are Americans covering emergency costs? More and more of them are leaning on their credit cards. The report showed that 25% of people would take on credit card debt to cover a $1,000 emergency expense and pay it off over time—a record percentage since polling started in 2014.
Why is this a problem? Because your payment history and the amount you owe are two of the most heavily weighted factors that go into calculating your credit score. And with credit card interest rates at record highs, carrying a balance from month to month could cost you tons in interest over time and potentially ding your credit score if you’re unable to make payments.
View this interactive chart on Fortune.com
“With one in four Americans telling us they’d react to a large emergency expense by using a credit card, their timing couldn’t be worse,” says Bankrate's senior economic analyst, Mark Hamrick. “On average, credit card interest rates are the highest we’ve seen and are slated to go higher as the Federal Reserve continues to hike. Under the best of circ*mstances, this debt should be paid before costly interest charges hit the account.”
How rising interest rates are playing a role
Rising interest rates can both help and hurt your ability to save. On the one hand, an increase in the Federal Funds rate makes borrowing more expensive and therefore carrying debt more costly. Most credit cards, for example, have variable annual percentage rates (APRs), meaning that they fluctuate and are susceptible to changes in the federal funds rate. When your APR goes up, any interest charges you incur for carrying a balance will increase as well, which could make it harder to eliminate your debt.
The flip side: Rising interest rates don’t just apply to debt. In many cases, savings rates will increase as well—making it an optimal time to open a high-yield savings account or CD and park your funds in the account that offers the highest rate to help your balance grow.
What to do if you’re concerned about having enough saved for emergencies
If you’re worried that even a small unexpected expense could throw your budget off, set yourself up to thrive by giving yourself a financial cushion.
Determine how much you need to save in the event that the worst happens. Most experts suggest saving anywhere from three to six months’ worth of living expenses, but the exact amount you should keep in your emergency fund will depend on your personal lifestyle and expenses. Where three months’ worth of expenses might be enough to support one person should that individual lose their job, a family of five may need extra funds to get by should there be a change in income within the household.
Shop around for a lucrative savings vehicle. With savings rates on the rise, it’s a good time to reevaluate and decide if your current savings account is still working for you. "For those who have been or are planning to sock money away for emergencies, it truly pays to shop around for the best rates, as high-yield savings yields are the highest since 2008,” says Hamrick. “This is a situation where having more money to work with, including higher yielding returns, can make an important difference." The most recent rates from the Federal Deposit Insurance Corporation (FDIC) put the national savings APY average at 0.33%, but most high-yield savings accounts offer 1.00% APY or higher, others offer well above 3% or 4%.
Make a plan to replenish any funds you use. You should aim to keep your emergency fund fully stocked, and when you are forced to dip into it you’ll need to make a plan for how you’ll replenish that money so that it’s available for use next time you need a financial lifeboat. Check in on your emergency fund periodically to see how your balance has grown and how much you have to work with. If you’re short on funds, crunch the numbers to figure out how much you need to get back to where you started and add a line item to your monthly budget for those savings until you’ve reached your goal.
The takeaway
You’ll never be able to predict when an emergency will happen, but you can almost always count on having one at some point. When that happens, you’ll want to feel confident in knowing that you have available funds stowed away to cover the expense.
This story was originally featured on Fortune.com
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As an expert in personal finance and economic trends, I bring a wealth of knowledge to dissect the key concepts discussed in Ivana Pino's article dated January 25, 2023, on Americans' struggles with emergency savings. I am well-versed in economic indicators, financial behaviors, and the intricate relationship between macroeconomic factors and personal finance.
The article primarily addresses the challenges Americans face in maintaining emergency savings, and several critical concepts need exploration:
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Emergency Savings Concerns:
- The article highlights that 68% of people are worried about covering living expenses for just one month if they lose their primary source of income. This indicates a precarious financial situation for a significant portion of the population.
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Generational Differences:
- A breakdown by generation reveals that Gen Zers (85%) and millennials (79%) are more likely to be concerned about covering emergency expenses. Understanding generational trends is crucial in tailoring financial advice and solutions.
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Reasons for Reduced Savings:
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Inflation, cited by 74% of respondents, is identified as the top reason for saving less. I can elaborate on how inflation erodes purchasing power and impacts individuals' ability to allocate funds to savings.
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Rising interest rates (68%) are another factor affecting savings. I can delve into the Federal Reserve's role in interest rate adjustments and how it trickles down to impact consumer financial products.
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Changes in employment or income (40%) are cited as reasons for reduced savings, indicating the broader economic landscape's influence on individual financial behavior.
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Credit Card Dependence:
- The article reports that 25% of people would resort to credit card debt for a $1,000 emergency expense. I can explain the implications of high credit card interest rates on individuals' financial health, including the potential impact on credit scores.
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Role of Rising Interest Rates:
- The article touches on how rising interest rates can both help and hurt individuals' ability to save. I can elaborate on the dual impact of interest rate changes on borrowing costs and savings rates.
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Financial Planning Recommendations:
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The article suggests strategies for individuals concerned about having enough saved for emergencies. This includes determining the needed savings amount, seeking lucrative savings vehicles, and making plans to replenish funds.
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Shopping around for high-yield savings accounts and monitoring the national savings APY average are key considerations in optimizing one's financial strategy.
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In conclusion, my expertise allows me to provide a comprehensive analysis of the economic factors influencing Americans' emergency savings, the consequences of their financial choices, and actionable steps to navigate these challenges.
