A recent survey conducted by GOBankingRates found that nearly half of Americans have $500 or less in their savings accounts, leaving them vulnerable to unexpected expenses. The survey, which polled 1,063 U.S. adults in November 2023, revealed that 29% of respondents have between $501 and $5,000 in their savings accounts, while the remaining 21% have $5,001 or more.
The survey also indicated that many Americans have minimal cash in their checking accounts. Of those surveyed, 60% reported having $500 or less in their checking accounts, while only about 12% had $2,001 or more.
The lack of cash in both savings and checking accounts suggests that a significant number of Americans are living paycheck to paycheck. This financial situation leaves them vulnerable to unexpected expenses, highlighting the importance of having an emergency fund if they are able to build one.
Financial planners commonly recommend building an emergency fund to cover unforeseen expenses. However, many Americans seem to lack such a fund. This could be due to a variety of reasons, including struggling to make ends meet during times of high inflation or simply not being in the habit of saving money for some affluent professionals.
The consequences of not having an emergency fund can be financially detrimental, as people often resort to high-interest credit cards to cover unexpected expenses. This can lead to a cycle of debt repayment and interest charges that are difficult to escape.
To avoid falling into this debt trap, experts recommend aiming to build an emergency fund worth three to six months of expenses. However, the specific amount will vary depending on individual circumstances. For example, someone who is single or has a non-working spouse might want to save up 12 months' worth of expenses.
Getting started on building an emergency fund requires finding room in the budget for monthly contributions. This may require temporarily reducing contributions to retirement accounts or making small contributions, such as $20 per month, until more income becomes available.
Once an emergency fund is established, it is advisable to keep it in a high-yield savings account. These accounts offer higher interest rates, currently around 4.5%, compared to the average of 0.6% for all savings accounts. However, only 9.8% of survey respondents reported having a high-yield savings account.
While inertia and the familiarity of traditional savings accounts may deter some from switching, the higher interest rates could make it worthwhile. Even a $500 balance in a high-yield account with a 4.5% interest rate would yield $22.50 in interest after one year, compared to just $3 with a traditional savings account.
In summary, the survey's findings reveal that a significant portion of Americans have minimal savings, leaving them financially vulnerable. The importance of building an emergency fund to cover unexpected expenses is underscored, with financial planners recommending three to six months' worth of expenses as a target. Additionally, utilizing high-yield savings accounts can help maximize the growth of emergency funds.