PITTSBURGH (KDKA) — Most Americans don’t have the cash to cover a $1,000 emergency expense, according to a new study.
Americans are simply not saving as much as they need to.
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Suppose your car needs emergency repairs, or a family member is rushed to the emergency room for treatment not covered by insurance, or your furnace blows up during this freezing winter. Could you easily get your hands on at least a thousand dollars?
“Only 44% of Americans could cover that with their savings,” Greg McBride, chief financial analyst at bankrate.com, told KDKA financial editor Jon Delano on Tuesday.
Bankrate.com conducted the study which found that a majority of Americans still have not set aside a cash fund for emergencies, although the numbers are improving.
“The good news is that it’s actually higher than in the previous eight years we looked at it. The bad news, of course, is that that still means more than half of American households couldn’t cover that $1,000 in savings and would have to resort to something else,” McBride says.
“I think a lot of the population feels financially fragile and, faced with the prospect of a financial emergency, should scramble,” notes Martha Deevy, a Stanford University professor, associate director of the Center on Longevity. .
Deevy says scrambling leads to non-optimal choices.
“Many people have access to other forms of emergency funding, which are not optimal at all, whether it’s tapping into family or friends or other sub-optimal means like payday loans” , Deevy said.
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The Bankrate study found that 35% borrowed money, often using their credit cards.
“Credit cards would be the number one option people would resort to if they had no savings, and that’s especially troubling in a year when we’re talking about rising interest rates. So the cost of that credit card debt — usually already the most expensive household debt — will only get more expensive,” McBride added.
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Everyone needs an emergency fund, experts say.
“Emergency savings are entirely different from retirement savings, and it’s neither. Those are both very, very important,” McBride says.
McBride says retirement savings aren’t accessible without penalty, so you need a separate cash account. How many? Take what you spend each month and multiply by six.
“You want to have enough to cover six months of expenses, but I insist on the fact that it is a destination. It’s not a starting point,” McBride says.
The need to set aside money for both retirement and emergencies is uniquely American, Deevy says, because most American companies no longer pay pensions to retirees.
“So we just added another financial stressor to the American population,” says Deevy.
Most Western countries offer government-funded pensions and benefits to their retirees, but American workers are now forced to fund their own retirement through 401ks and IRAs, as well as save for disaster. emergency at the same time.
“One of the things that really changed in the savings landscape for the American people was when we moved from a pension-based retirement system to a defined-contribution retirement system, and we put more responsibility on the individual.”
Individual responsibility means setting aside money each month for an emergency.
“Pay yourself first,” says McBride. “Don’t wait until the end of the month and try to keep what’s left because too often there’s nothing left.”
If there’s any good news to come out of this study, it’s that millennials are saving more these days than their elders, Gen Xers and baby boomers.
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Yet too many of them don’t save much at all.