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High costs for everything from gas to groceries to housing may be making it hard for people to save like they used to.
More than a third of Americans have a higher amount of credit card debt than they have in emergency savings, according to a Bankrate report published in February. Financial advisors tend to recommend setting aside enough cash to cover three to six months of expenses in case of an emergency like a surprise medical bill or a job loss. But the data from Bankrate shows that isn’t the reality for many Americans, thanks at least in part to high inflation.
A financial shock can cause significant harm if you don’t have the right cushion. But how does one get started building an emergency fund, and how much is enough? Is saving even possible in today’s economic climate?
Americans Aren’t Saving Like They Used To
During the pandemic, the U.S. savings rate hit a record high as Americans squirreled away their cash. Since then, it’s been a different story.
Data suggests that “American households [have] fully spent their pandemic-era savings as of March 2024,” write economists for the Federal Reserve Bank of San Francisco. Meanwhile, CNBC reports that in 2024, 53% of Americans feel behind on retirement planning and savings. A majority of Americans are more preoccupied with paying the bills than saving for their financial future, according to a report by Allianz Life.
Is inflation to blame?
Many Americans cite inflation as a reason why they do not have savings. The Allianz Life study found that 69% of respondents are unable to save due to inflation.
Amid a higher cost of living, some Americans have fallen deeper into credit card debt. High interest rates have also made it more expensive to borrow money.
How Much of an Emergency Fund Do I Need?
We never know what life has in store for us, but an emergency fund provides an extra cushion in case of a financial emergency like losing your job. The exact amount you should save all depends on factors like your income, bills and household size.
Typically, financial advisors recommend saving three to six months’ worth of expenses. That means if your monthly expenses are $5,000, you should ideally save $15,000 to $30,000. A larger fund may be necessary if you have any dependents, are retired, have an older home or car or engage in freelance or seasonal work. If you have other financial support in your life — like from parents — you may not need as large an emergency fund.
Even saving a small amount helps. Start with setting aside a small amount of your paycheck for an emergency fund, then increase the amount if possible.
How to Create an Emergency Fund
Building an emergency fund does not have to be a painful process. There are a few tips that can help you create and grow your emergency fund, even in times of inflation or uncertainty.
1. Make Regular Deposits
Not everyone has a large chunk of cash to put aside, but even $100 a month can make a difference over time. Review your finances to see what you can reasonably put aside each month, and be diligent in your deposits.
If you get a raise or pay off debt, consider raising the amount of your emergency fund deposits to give yourself greater protection in the future.
2. Consider a High-Yield Savings Account
A high-yield savings account allows you to earn interest on the funds in your account. It generally offers a higher interest rate than a traditional savings account, using a variable rate largely based on the federal funds rate.
It is an especially popular savings vehicle right now, given that the best high-yield savings accounts are offering high interest rates that can top 5% with no or few fees.
With rates like these, your savings can grow that much quicker.
3. Ensure Immediate Access to Funds
An emergency fund is hardly worth it if you can’t access your funds when you need them. When choosing an account to house your savings, be sure that you will be able to access your money when you need it and check to see if any fees apply.
4. Save for True Emergencies
It may seem obvious, but you ideally shouldn’t touch these funds unless you really need to. It can be tempting to use that cash for a non-emergency, but you will then find yourself short if there is an unexpected financial difficulty.
If you must access the funds, make a plan to replace them as soon as possible so you are not left ill-prepared during a crisis.
Sources
Bankrate. (2024, April 23). Bankrate’s 2024 Annual Emergency Savings Report. Retrieved from https://www.bankrate.com/banking/savings/emergency-savings-report/.
GOBankingRates. (2024, April 23). How Much Money Do Americans Have in Their Bank Accounts in 2024? Retrieved from https://www.gobankingrates.com/banking/banks/how-much-money-do-americans-have-in-their-bank-accounts-in-2024/.
Allianz Life Insurance company of North America. (2024, April 23). Americans Reducing Retirement Savings and Taking on Debt Due to Inflation. Retrieved from https://www.allianzlife.com/about/newsroom/2024-Press-Releases/Americans-Reducing-Retirement-Savings-and-Taking-on-Debt-Due-to-Inflation.
Board of Governors of the Federal Reserve System. (2024, April 23). Press Release: Federal Reserve Issues FOMC Statement. Retrieved from https://www.federalreserve.gov/newsevents/pressreleases/monetary20240320a.htm.
Fidelity. (2024, May 20). Emergency Fund: What It Is And Why You Should Have One. Retrieved from https://www.fidelity.com/learning-center/smart-money/emergency-fund.
Bureau of Economic Analysis, U.S. Department of Commerce. (2024, April 23). Personal Saving Rate. Retrieved from https://www.bea.gov/taxonomy/term/746.
Federal Deposit Insurance Corporation. (2024, April 23). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html.
