PITTSBURGH (KDKA) — Most Americans don’t have the cash to cover a $1,000 emergency expense, a new study reports.
Americans just aren’t saving as much as they need.
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Let’s say your car needs urgent repairs, or a family member is taken to the emergency room not to be covered by insurance, or your furnace blows out during this frigid winter weather. Could you easily get your hands on at least a thousand dollars?
“Only 44 percent of Americans could cover that from savings,” Greg McBride, chief financial analyst at bankrate.com, told KDKA money editor Jon Delano on Tuesday.
Bankrate.com conducted the study, which found that the majority of Americans still don’t have a cash fund set aside for emergencies, although the numbers are getting better.
“The good news is that’s actually higher than the previous eight years we’ve been looking at it. The bad news, of course, is that this still means more than half of American households wouldn’t have enough savings to cover that thousand dollars and would have to fall back on something else,” says McBride.
“I think there’s a large segment of the population that feels financially weak and needs to pull itself together at the prospect of financial hardship,” notes Martha Deevy, a Stanford University professor and associate director of the Center on Longevity.
Deevy says scramble leads to less-than-optimal decisions.
“Many people have access to other forms of emergency financing that aren’t optimal at all, whether it’s through tapping from family or friends or other suboptimal avenues like payday loans,” Deevy said.
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Bankrate’s study found that 35 percent would borrow the money, often with their credit card.
“Credit cards would be the number one option people would turn to if they didn’t have the savings, and that’s particularly worrying in a year when we’re talking about rising interest rates. So the cost of that credit card debt – typically the most expensive that households have – is only going to get more expensive,” McBride added.
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Everyone needs an emergency fund, the experts say.
“Emergency saving is very different from saving for retirement, and it’s not an either/or. Both are very, very important,” says McBride.
McBride says the retirement savings cannot be accessed without penalty, so you need a separate cash account. How much? Take what you spend each month and multiply by six.
“You want to have enough to cover six months’ expenses, but I stress that’s a goal. That’s not a starting point,” says McBride.
The need to set aside money for both retirement and emergencies is inherently American, Deevy says, because most American companies no longer provide pensions to retirees.
“So we added another financial stressor to the US population,” says Deevy.
Most Western nations provide pensions and federally funded benefits to their retirees, but working Americans are now forced to fund their own retirement through 401ks and IRAs while saving for an emergency.
“One of the things that’s really changed about the savings landscape for the US population is when we went from a pension-based pension system to a defined-contribution pension system and we shifted the responsibility more to the individual.”
Personal responsibility means putting some money aside each month for emergencies.
“Pay yourself first,” says McBride. “Don’t wait until the end of the month and try to salvage what’s left, because too often there’s nothing left.”
If there’s good news from this study, it’s that millennials are now saving more than their elders, Gen Xers and baby boomers.
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Still, too many don’t save much at all.