Nearly half of Americans have $500 or less of their savings accounts, an amount that leaves them vulnerable to unexpected expenses, in response to a GOBankingRates survey of 1,063 U.S. adults conducted in November 2023.
About 29% of respondents have between $501 and $5,000 of their savings accounts, while the remaining 21% of Americans have $5,001 or more.
Few hold much money of their checking accounts as well. Of those surveyed, 60% report having $500 or less of their checking accounts, while only about 12% have $2,001 or more.
The dearth of money in either savings or checking accounts suggests that many Americans live paycheck to paycheck. This leaves them vulnerable to unexpected expenses, underscoring the importance of getting an emergency fund, in the event that they’re in a position to construct one.
Financial planners commonly recommend keeping a reserve of money, often called an emergency fund, available to cover unexpected expenses. Yet many Americans don’t appear to have one.
There are a lot of reasons for this. In some cases, Americans may struggle to make ends meet during times of high inflation. But in others, it could be a matter of affluent professionals who aren’t within the habit of saving money.
“The lack of Americans to resist an emergency costing $500 and even $1,000 will be financially detrimental, with a domino effect on their life,” says Alex Lozano, an authorized financial planner and founding father of Lozano Group Wealth Management.
That is because people often depend on high-interest bank cards to cover unexpected expenses, he says.
“Accumulating debt can result in a cycle of repayment and interest charges that will be difficult to flee,” says Christopher Lazzaro, chartered financial consultant and founding father of Plan For It Financial. “An emergency fund helps you avoid falling into this debt trap.”
Lazzaro recommends aiming to construct an emergency fund that is price three to 6 months of your expenses, although “everyone’s situation goes to be different.” Someone who’s single or with a non-working spouse might want to save lots of up 12 months price of expenses, he says.
To start, you will need to search out room in your budget for monthly emergency savings contributions, which will be easier said than done.
When you aren’t in a position to in the reduction of in your day-to-day expenses, it could make sense so that you can temporarily reduce any contributions to retirement accounts. “Before people begin to speculate for his or her future, they need to create an emergency account,” says Lozano.
It’s OK to begin small, too, even when that is putting away only $20 per thirty days. What’s essential is that you simply get within the habit of constructing regular contributions, which will be increased later when you’ve gotten more income.
Once you’ve got carved out a few of your monthly income to accumulate an emergency fund, it might probably be smart to stash it in a high-yield savings account where it’s going to collect interest and will be withdrawn quickly in case of an emergency. Currently, you could find high-yield savings accounts with annual percentage yields near 4.5%, compared with a mean of 0.6% for all savings accounts, per Bankrate.
And yet, only 9.8% of survey respondents say they’ve a high-yield savings account, GOBankingRates found.
One reason people don’t switch over, despite the higher rates, is inertia, since many have already got a conventional savings account with the bank they have been with for years.
But the upper rates of interest may be well worth the switch. For a $500 balance in a high-yield account offering 4.5%, that works out to $22.50 in interest after one 12 months, compared with just $3 with a conventional savings account.
While which may not seem to be quite a lot of money at first, it’s going to proceed to grow over time, especially when you construct up your emergency fund to cover many months price of expenses.