According to recent reports by Bankrate, a startling number of Americans have not been able to set money aside, largely due to skyrocketing inflation and rising interest rates.
Key findings include:
- 81% of adults did not contribute to their emergency savings this year.
- 60% feel they are lagging in building a necessary cash cushion.
- Only 19% of families reported an increase in their emergency savings balances since the beginning of the year.
Rising prices and high household expenses are the main culprits behind the difficulty in boosting emergency savings. “When expenses rise faster than income, households are trapped,” commented Greg McBride, Bankrate’s chief financial analyst. The pandemic years saw the U.S. government offering monetary relief to families, which provided a temporary respite. However, the accumulated savings from this period are mostly exhausted, intensifying concerns for the future. As Sung Won Sohn, a professor at Loyola Marymount University observed, “Savings are running out.”
Key Insights from the Data
Based on a survey of approximately 2,500 U.S. adults conducted in September:
- 32% of households have less emergency savings now than at the beginning of 2023.
- The primary obstacle to saving, cited by 57% of households, is inflation.
- 38% have stated excessive expenses as a reason for not increasing savings.
- A significant 38% feel they are notably behind on saving for emergencies, and 22% believe they’re slightly off track.
- Concerningly, a chunk of respondents don’t foresee ever getting back on track with their savings.
Generational and Income Disparities
When we dissect the data based on age and earnings, we see significant variations:
- Seniors from older groups, such as Generation X, stated they had seen a drop in their savings. A percentage of about 39% had less compared to the start of the year, while only 21% of Generation Z reported a similar situation.
- Families that amassed an annual income of at least $ 100,000 or above were likely to have augmented their contingency funds compared to those whose earnings were smaller.
- In terms of income in households, it was observed that the higher ones did not readily end up with no disaster funds available.
Overcoming the Challenge
Most financial experts suggest that households should maintain three to six months’ worth of expenses in their emergency savings. With increasing costs for essential items such as food, shelter, and energy, cutting down on expenses might not be an effective solution for everyone. McBride offers an alternative approach: “Consider tapping into the tight labor market with side gigs or even a second job for a period to boost savings.”
Why Savings Didn’t Increase: A Deeper Look
Apart from inflation and high expenses, various reasons were cited for not increasing emergency savings:
- Too much debt:21%
- Changes in income or employment status: 18%
- Escalating interest rates: 17%
- Encountering a significant emergency expense: 13%
- Excessive discretionary spending: 8%
Strategies for Building Emergency Savings
In light of the current economic challenges, it’s imperative to adopt effective strategies to counteract the financial strain. Here are a few tried-and-tested approaches:
1. Assess and Prioritize Your Expenses
Begin by scrutinizing your monthly expenses. Categorize them into ‘essentials’ and ‘non-essentials’. While essentials include housing, utilities, and groceries, non-essentials might encompass luxury items, dining out, or entertainment. By identifying areas where you can cut back, you can divert more funds towards your emergency savings.
2. Automatic Transfers
Set up automatic transfers from your primary account to your savings account. Even if it’s a small amount, regular transfers can accumulate over time, making a significant impact.
3. Diversify Your Income
As Greg McBride suggested, considering the tight labor market can be advantageous. Beyond side gigs or a second job, explore online opportunities like freelance work, online tutoring, or selling products on e-commerce platforms.
4. Save Windfalls
Any unexpected income, such as tax refunds, bonuses, or gifts, can be directed towards your emergency fund. While it might be tempting to splurge, think of the long-term benefits of bolstering your savings.
5. Revisit and Adjust
Financial situations can be dynamic. It’s essential to review your financial goals and strategies periodically. Ensure you adjust your savings plan according to any changes in income, expenses, or personal circumstances.
6. Explore Low-Risk Investments
For those with a slightly larger savings buffer, exploring low-risk investments can be a way to grow your money, counteracting the effects of inflation. Research options like certificates of deposit, money market accounts, or government bonds which typically offer higher returns than standard savings accounts.
The current economic landscape is posing challenges for American households. With inflation eroding purchasing power and expenses surging, building and maintaining an emergency fund has become a formidable task. Finding alternate income streams and prudent financial planning are ever more crucial. For further reading on managing finances in trying times, consider this comprehensive guide on financial planning.