Why Americans Worry about Emergency Savings

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By
Kara Robinson
September 6, 2022

When Americans don’t have savings, their health and their children’s health suffers.

Lack of emergency savings affects Americans’ stress levels, workplace productivity, and the health of themselves and their children. It’s even caused many Americans to retire early. Arguably, not saving for emergencies is America’s biggest financial regret. 

Lack of emergency savings has some significant, and perhaps surprising, effects on Americans:

  • Increased risk of financial shock 
  • Expensive debt costs to pay for emergencies
  • Risk of extreme hardship
  • Increased likelihood of expensive health conditions 
  • Increased risk of childhood obesity and chronic illness 
  • Early retirement to take care of family members with health problems 
  • Fears of not being able to retire

The Federal Reserve reports that nearly half of Americans don’t have enough savings to cover a basic emergency such as a car repair or a broken appliance. If faced with a $400 emergency, 41 percent of Americans would need to put it on a credit card and pay it off over time, borrow from friends and family, sell something, or take out a payday loan. 

A shocking 12% would not be able to deal with the emergency at all. This situation has significant impacts on Americans and their employers. 

Lack of savings increases the risk of suffering a financial shock

For over a decade, around half of Americans have consistently reported that they have at least three months’ worth of expenses in savings. These Americans have the resources they need to weather a short-term emergency or even a job loss or illness. But what about the rest of the country?  

When financial emergencies strike, households without savings accounts experience severe financial shock. According to research from Pew Charitable Trusts, over half of U.S. households were shocked by a health emergency, job loss, or major vehicle or home repair. 

Unfortunately, these were not isolated events. When a household experiences a financial shock, it’s very likely to experience another one shortly thereafter – 70% of households who experienced a financial shock due to lack of savings experienced another the following year.

Lack of savings means families spend more on emergencies

This isn’t surprising. When people don’t have emergency savings to deal with unexpected expenses, they generally have to pursue options that cost them more down the road. Using payday loans or credit cards to cover emergencies costs families a lot in the long run. 

If someone pays the minimum monthly payment on a credit card with a 19% interest rate, it will take them nearly three years to pay off a $400 expense. About 16% of Americans say this is how they would deal with an emergency. The 2% of Americans who utilize overdrafts or take out payday loans to deal with emergencies are in an even worse situation. The average payday loan borrower pays $520 in fees to borrow $375, and once they get into this cycle they end up being in debt for five months, on average, every year. 

Lack of savings puts households at risk of negative outcomes

When households don’t have money for emergencies, they face a great risk of experiencing hardship when an emergency strikes. About 12% of households say they wouldn’t be able to cover a financial emergency. What happens when you can’t borrow from friends or family, use a credit card, or overdraw your bank account? The emergency gets worse. 

As an example, suppose someone has a leak in their water pump or an issue with their vehicle’s radiator. They don’t have the money to repair it, so they just keep driving. The situation escalates, the engine overheats, and instead of the simpler repair, they now either have to buy a new vehicle or find thousands of dollars to replace the motor. Similarly, if someone can’t repair a broken water heater or furnace, they end up with no heat or hot water. 

Every day, millions of Americans are in similar situations. They have to make tough choices with their money. They’re choosing between car repairs and energy bills. They’re juggling untold sums of debt. This stress doesn’t just affect their finances – it also affects their health and the health of their children. 

The American Psychological Association reports that financial stress has a significant impact on people’s physical and mental well-being. Stress exacerbates the risk of heart disease, diabetes, migraines, and other high-cost medical problems. This results in even more stress. 

People experiencing financial stress report feeling irritable, anxious, fatigued, and depressed. About 42% of people who are stressed say they lose sleep and one-third say it affects their eating habits. It also impacts relationships – 41% of people who are financially stressed are short with their spouses and 18% say they have snapped at a coworker. 

Lack of savings also affects children 

UCLA researchers say that children in homes with less than three months’ worth of emergency savings have a substantially higher risk of obesity and chronic illness. These risks are not necessarily correlated with a lack of income. Even in situations where families don’t earn adequate pay, their children aren’t as likely to experience these outcomes if the family has savings. 

Economists call a lack of savings “asset poverty.” About half of American families with children are experiencing asset poverty. This is double the number of families living in income poverty. 

Lack of savings means pre-retirees are not ready for health emergencies

Only 19% of pre-retirees (people ages 50 to 65) report that they’re ready for retirement. The other 80% are worried they won’t be able to maintain their standard of living from their working years during retirement. And one-third say they’re not ready for a financial shock like a market downturn, continued inflation, or health challenges. 

It’s not just that pre-retirees lack assets. They also lack the financial know-how to feel confident about their retirement. But in spite of not feeling prepared, an increasing number of people are jumping into early retirement. From March 2020 to August 2021 alone, approximately 2.4 million people retired early. 

When asked why, about one-third of these new retirees said they quit working to take care of a family member with a health problem. These people may have been able to take a different path if they had liquid savings. Pre-retirees who are still working are also concerned about health care – 25% identify medical costs or accidents as their biggest financial worries. 

Helping workers save for emergencies helps to alleviate many of these issues. But Americans don’t just need help managing their savings. They also need the right education. When pre-retirees work with a financial planner or advisor, they become more prepared for a financial emergency, but they also become five to 10 times more likely to feel ready for retirement. 

Promoting emergency savings takes a multi-faceted approach. Employees need a combination of financial education, wellness initiatives, and access to emergency savings accounts funded by automatic payroll contributions. To learn more, contact us at SecureSave today.  

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Kara Robinson

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