The start of the new year brought more favorable economic conditions for Americans than expected, with lower inflation rates and strong employment numbers that exceeded experts’ expectations. However, despite this unexpectedly strong economic performance, a large number of Americans find themselves lacking sufficient savings to meet unexpected emergency expenses.
Concerns persist about emergency saving amid limited preparedness for $1,000 expenses
According to the bank’s latest interest rate survey, only 44% of US adults claim they will cover emergency expenses with $1,000 or more from their savings. This represents a slight increase from 2023, when 43% reported the same, and shows no change from the numbers recorded in 2022.
As for those who do not have sufficient savings, 35% resort to borrowing, either through financing credit cards, personal loans, or asking for help from family or friends. The findings, part of the central bank’s annual emergency savings report conducted in collaboration with polling partner SSRS, highlight persistent concerns about Americans’ preparedness for unexpected financial challenges.
The survey, running since 2014, is conducted on more than 1,000 American adults annually, exploring their levels of emergency savings and measuring economic factors that influence saving behaviors, along with assessing concerns about emergency funds in the event of a job loss.
The latest data, collected in December 2023, addresses the economic challenges affecting saving habits and concerns surrounding emergency funds in the event of loss of income.
Key insights into emergency funds and personal savings
A recent study of financial preparedness in the United States revealed noteworthy statistics regarding emergency funds and personal savings. Fewer than 45% of American adults claim they can cover a major emergency expense of $1,000 or more from their savings, prompting 35% to consider borrowing money. This borrowing includes 21% relying on credit cards, 10% asking for help from relatives, and 4% choosing personal loans.
Inflation is emerging as a prevalent factor affecting saving habits, with 63% of US adults citing inflation as a reason to reduce saving to cover unexpected expenses. Likewise, 45% attribute lower savings to higher interest rates, while 19% find themselves saving more due to higher interest rates.
The specter of reduced savings looms large, with 66% worrying about not having enough emergency funds to cover a month’s living expenses if their household’s primary income suddenly disappears.
57% of US adults express this Discomfort with their current emergency savings Level, based on May 2023 surveys. However, there is a slight positive trend, with only 22% reporting no emergency savings at all, the second lowest percentage in the 13 years of the survey conducted up to May 2023.
Behavioral experts’ insight into overcoming saving challenges
Mark Hamrick, chief economic analyst at Bank Rates, highlights the precarious financial situation of many Americans, noting that less than half would use their savings to cover an additional $1,000 in emergency expenses. Inflation is identified as a major obstacle to progress in savings. Despite this challenge, it points to a silver lining in the form of higher interest rates, which provide more generous returns on savings.
Hamrick draws attention to the paradoxical situation where high interest rates on credit card debt, which average about 21%, coexist with the fact that 21% of Americans can use credit cards and pay off expenses over time. He warns that this approach risks setting individuals back on their financial goals.
Expressing concerns about the large percentage of adults who have no savings or credit card debt, Hamrick emphasizes the risk of experiencing significant stress or financial hardship when faced with unplanned expenses such as major home or car repairs.
For those who prioritize emergency saving, the expert believes there is an advantageous moment to take advantage of increasing interest rates. He recommended taking advantage of high-yield savings accounts, focusing on their liquidity and accessibility as a form of self-insurance against unplanned expenses.
The upbeat economic conditions at the start of the year, marked by low inflation and strong employment numbers, appear to coexist with a troubling financial reality for many Americans, as highlighted by the Bank’s latest interest rate survey.
A relative look at how average Americans handle unexpected expenses and savings
The survey indicates that more than a third of Americans would borrow money when faced with an unexpected $1,000 expense that requires careful consideration.
As one user on the Reddit economics forum /r/ explained, the survey question asks, “How would you pay for an unexpected expense of $1,000?” Provider choices, such as “put it on credit card” or “reduce spending,” do not explicitly reveal whether individuals have savings but reflect their preferred style of dealing with expenses.
While the survey indicates that a large proportion will borrow, it does not necessarily confirm a lack of savings. Individuals may choose alternatives such as credit cards or cut back on spending for reasons beyond the absence of savings, such as a reluctance to deplete their savings or seeking more immediate financial solutions.
Responses to borrowing may not only stem from insufficient savings, but can be influenced by financial attitudes and preferences. Reluctance to use savings may be a deliberate choice, underscoring the importance of understanding individual financial behaviours.
The survey’s focus on preferred payment methods does not provide a complete picture of individuals’ financial health or actual availability of savings. Responses may reflect diverse financial strategies rather than a lack of preparedness.
It is important to interpret survey data accurately, recognizing that participants may have different financial situations and strategies. A preference for saving alternatives does not necessarily indicate financial weakness, but rather indicates diverse approaches to managing unexpected expenses.
In contrast to the survey, the commentator also highlights that direct inquiries about savings status present a different picture. With the average American having savings of $8,000, 44% are unlikely to have less than $1,000 in savings, which presents a challenge to interpreting the survey.
The survey data, as highlighted in the commentary, underscore the importance of careful interpretation. It calls for a re-evaluation of the importance of the survey in determining the actual savings status of individuals and emphasizes the need to consider diverse financial behaviors and decision-making processes.