In a year marked by inflationary pressures and rising interest rates, a significant portion of American households have found it challenging to contribute to their emergency savings. A staggering 81% of adults have not added to their emergency savings this year. This trend underscores the financial strain many are experiencing, with 60% feeling they are lagging in building a financial safety net.
The Bankrate report highlighted by CNBC revealed that the predominant barriers to enhancing emergency savings have been the surge in prices and elevated household expenses. Greg McBride, Bankrate's chief financial analyst, commented, "When expenses increase faster than income, that puts households in a bind." This sentiment was echoed in the USA Today article, which noted that 57% of households that either did not augment their emergency savings or have no savings at all attribute inflation as the primary deterrent to saving more.
Historically, many Americans had the advantage of government-provided safety nets, especially the substantial stimulus funds that resulted in a significant cash reserve for many households post-2020. However, Sung Won Sohn, a professor of finance and economics at Loyola Marymount University, pointed out that these reserves have been largely depleted as consumers spent their excess savings accumulated during the pandemic years. He expressed concerns about the future, stating, "Going forward, I am beginning to worry because savings are running out."
The aftermath of the pandemic has not only made it challenging for households to meet their daily needs but has also made borrowing more expensive. The Federal Reserve's aggressive interest rate hikes, the most intensive in four decades, have added to the financial burden.
Despite these challenges, financial experts consistently recommend having a savings buffer equivalent to three to six months' worth of expenses. This becomes even more crucial for individuals who are the sole earners in their families or those running their businesses. McBride suggests that in the current economic climate, where cutting household expenses might not be feasible due to the price surge in essential items, individuals should consider alternative income sources. He recommends exploring the tight labor market for opportunities like side hustles, freelance or contract work, or even taking on a second job temporarily to enhance savings.
The USA Today report further delved into the demographics of those with emergency savings. It highlighted that older generations, compared to their younger counterparts, are more likely to have a reduced emergency savings balance now than at the start of 2023. For instance, while 21% of Gen-Zers reported having less emergency savings, a notable 39% of Gen Xers expressed the same sentiment. Additionally, the likelihood of having no emergency savings, either currently or at the beginning of the year, diminishes as household income rises.
The economic challenges of 2023 have made it evident that while the importance of emergency savings remains paramount, the ability to contribute to such funds has become increasingly difficult for a significant portion of the American population. As the year draws to a close, the focus will likely shift to strategies and solutions that can help households navigate these financial hurdles and ensure a more secure financial future.
