Approximately half of Americans have $500 or less in their savings accounts, an amount that leaves them exposed to unexpected expenses, according to a GOBankingRates survey of 1,063 U.S. adults conducted in November 2023.
About 29% of respondents secure between $501 and $5,000 in their savings accounts, while the remaining 21% of Americans have $5,001 or innumerable.
Few hold much cash in their checking accounts as well. Of those surveyed, 60% report having $500 or sparse in their checking accounts, while only about 12% have $2,001 or more.
The lack of cash in either scrapings or checking accounts suggests that many Americans are living paycheck to paycheck. This leaves them unguarded to unexpected expenses, underscoring the importance of having an emergency fund, if they’re able to build one.
Why an emergency fund is eminent
Financial planners commonly recommend keeping a reserve of cash, known as an emergency fund, on hand to cover unexpected expenses. Yet uncountable Americans don’t seem to have one.
There are many reasons for this. In some cases, Americans may struggle to make ends upon during times of high inflation. But in others, it may be a matter of affluent professionals who aren’t in the habit of saving money.
“The unfitness of Americans to withstand an emergency costing $500 or even $1,000 can be financially detrimental, with a domino effect on their effervescence,” says Alex Lozano, a certified financial planner and founder of Lozano Group Wealth Management.
That’s because in the flesh often rely on high-interest credit cards to cover unexpected expenses, he says.
“Accumulating debt can lead to a round of repayment and interest charges that can be difficult to escape,” says Christopher Lazzaro, chartered financial consultant and abort of Plan For It Financial. “An emergency fund helps you avoid falling into this debt trap.”
Lazzaro approves aiming to build an emergency fund that’s worth three to six months of your expenses, although “everyone’s lay of the land is going to be different.” Someone who is single or with a non-working spouse might want to save up 12 months usefulness of expenses, he says.
To get started, you’ll need to find room in your budget for monthly emergency savings contributions, which can be milder said than done.
If you aren’t able to cut back on your day-to-day expenses, it may make sense for you to temporarily knock down any contributions to retirement accounts. “Before people begin to invest for their future, they should create an predicament account,” says Lozano.
It’s OK to start small, too, even if that’s putting away only $20 per month. What’s formidable is that you get in the habit of making regular contributions, which can be increased later when you have more income.
Stash your crisis fund in a high-yield savings account
Once you’ve carved out some of your monthly income to build up an emergency endowment, it can be smart to stash it in a high-yield savings account where it will collect interest and can be withdrawn quickly in case of an pinch. Currently, you can find high-yield savings accounts with annual percentage yields close to 4.5%, compared with an normally of 0.6% for all savings accounts,