Are Americans Prepared for a Financial Emergency?

Emergency_FundsThe recommended emergency savings amount is around three-six months worth of expenses.  Three months worth of expenses in savings is the absolute minimum recommended by most financial planning experts.  Bankrate.com released a survey revealing how much Americans have prepared, should another financial crisis be on the horizon, or should a substantial personal financial loss (such as job loss or a significant medical expense) arise.  Factors that appear to correlate with the survey results are age and income levels.  The data is as follows:

  • 26% of Americans have no emergency savings
  • 67% of Americans have saved less than the recommended six months of expenses; half of the 67% have saved less than the recommended three months of expenses

National Mortgage Professional Magazine noted that, “the percentage of Americans with at least three months expenses in savings declined from 45 percent last year to just 40 percent this year.  The results did not mention other changes in statistics between this year and last year.

National Mortgage Professional Magazine also included an interesting point about the different age groups and their savings habits: “People between ages 30 and 49 are more likely than any other age group to have no emergency savings.  However, 18-30 year-olds are the most likely to have up to five months’ expenses saved up.  Why the contrast?  McBride explains, ‘Many of those under age 30 have the benefit of lower expenses due to roommates, living with their parents or being students.  Ages 30 through 49 are high-spending years when expenses often rise faster than emergency savings can keep up”.  It makes sense that because persons in the age group of 18-30 years old are able to save more due to less overhead costs, and the age group of 30-49 year old have to spend more because those are the years in which people are typically starting families and have higher overhead as they are supporting more than just one person.  Perhaps this age group is also accumulating more large debts such as mortgages as opposed to those in the 18-30 year old age group.

Greg McBride, CFA and Bankrate.com’s Chief Financial Analyst stated, “Americans continue to show a stunning lack of progress in accumulating sufficient emergency savings.  Even among the highest-income households – those with annual income of $75,000 or above – fewer than half (46 percent) currently have a 6-month savings cushion.  However, it is notable that the stock market has been setting record highs, which means that it is possible that instead of allowing money to sit in a savings account, more Americans are willing to take risk and keep money ‘at play’ in the stock market where there is the possibility of receiving a higher return on investment than a savings account could ever offer.  Either way, whether the income is at $75,000 per year or $20,000 per year, Americans should seriously consider assessing their financial situations to cut costs where possible and make more of an effort to get to the three-six months savings point.  In order to do this, maintain focus on long-term goals rather than day-to-day goals.  Savings should be a significant part of every day life.

A great way to save is to view extra bonuses or a raise as money for savings before it even gets touched.  For example, if an employee receives a bonus one pay-period at work, they should immediately funnel that into the savings account.  That money would not usually be there to cover expenses, so one shouldn’t allow it to serve as a ticket to increase expenses.  By doing this, the employee is not losing out on anything, whereas by spending that money it would be viewed as a loss.  Another great tip is to put savings into auto pay, or set up as a recurring payment out of your bank account.  If the amount is more variable than fixed, it’s a good idea to turn savings into a game.  Instead of going to Starbucks and spending $10 dollars on overpriced coffee and a pastry, brew your own coffee and make breakfast before going to work and filter than $10 dollars into your bank account that day.  Each day, pick a new “sacrifice”.  You will be surprised as to how much your savings account can grow by making these mini sacrifices each day.

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