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Do you have emergency savings?

Fewer Americans are saving money for a rainy day. Here's why people don't have emergency funds -- and how you can buck the trend.

By MSN Money Partner Jun 25, 2012 2:13PM

This post comes from Sheyna Steiner at partner site


Have Americans already forgotten the lessons learned in the financial crisis? The number of people with no money saved for emergencies has risen to 28%, up from 24% a year ago, according to Bankrate's Financial Security Index.


About one in five people are slightly better off, with enough savings in an emergency fund to cover less than three months of expenses, while 42% of those polled say they have at least three months' worth of cash saved. (Post continues below.)

Income and education matter

The general rule of thumb calls for enough cash to cover six months of living expenses. It depends whom you ask, though. The recession prompted many financial advisers to boost that recommendation to 12 months' worth or more.


Image: Pile of US paper currency with padlock on top (© Robert George Young/Photographer)Not surprisingly, earning more than $75,000 per year vastly increases the odds of hitting the minimum recommendation of six months; 45% of high-income earners say they've reached or surpassed that mark.


Only 9% of these high earners say they have no rainy-day fund, compared with 52% of those earning less than $30,000.


A college degree is also fairly predictive of emergency fund savings: 41% of college graduates report enough savings to cover expenses for six months or more, versus 14% of those with a high school education.


Saving vs. paying down debt

While Americans may be struggling to save money, the collective debt load is smaller than it was several years ago, particularly when it comes to revolving accounts such as credit cards.


Between 2008 and 2010, consumers significantly paid down revolving credit accounts, according to figures from the Federal Reserve's April report on consumer credit.


Rather than stocking household coffers with extra funds, consumers who now lack substantial emergency funds may have used extra money to service debt instead.


"While the debts are down quite significantly on a household basis from prior years' levels and the households are much better off, I believe that this drop in debts came at the expense of savings," says Robert Fuest, the chief operating officer and head of investment research at Landor & Fuest Capital Managers in New York.


Now that debt loads are lighter, the new challenge is to build up savings to avoid falling back into a cycle of debt.


Breaking bad habits

Consumers are constantly barraged by marketing, none of which espouses living below your means and managing money responsibly.


"Many Americans used debt to fund about 20% of their lifestyle choices. They were running cash-flow negative, in essence," Fuest says.


Scaling back spending doesn't happen overnight, particularly in a society where the economy is powered by ever-increasing consumer demand.


It can take some time to change the mindset that leads to overspending, but there's an easy shortcut to boosting savings: automation.


"If you have an employer that can split out the amount that you are taking home and force-feed savings into an account that is out of sight and out of mind, I think that is one of the best ways," says Elliot Herman, a certified financial planner and partner at PRW Wealth Management in Quincy, Mass.


Alternatively, if your employer doesn't offer the option of splitting your direct deposit, an automatic transfer can be set up from your primary checking account to a savings account on the same day you're paid. The end result is the same; the money is spirited away before it's available to be spent.


Where to park your emergency fund

For most people, establishing an emergency fund is a process in which a small pile of savings gradually grows into a larger one.


Keeping emergency savings fairly liquid is important, but once the fund reaches critical mass, savers may want more yield than they can find in a savings account or money market account.


With a sizable pot of money saved, placing a portion into a short-term bond fund could be a good idea, according to Herman.


"I would be wary of some of the higher-yielding short-term bond funds; those could have minefields within them that we don't know about right now. I don't think they're worth the risk. But I think there is something in between those and an ultrasafe savings account that is higher quality and is worth the risk," he says.


Yield should be secondary to liquidity, though. In general, earning a decent return on your savings is less important than simply having funds at the ready.


In the recession, Americans saw "how fast things can change, and they change beyond your

control," says Susan Hirshman, the president of consulting firm SHE LTD and author of "Does This Make My Assets Look Fat?"

"The only person responsible for you is you. You really can't rely on anyone," she says.


With millions still out of work, home values still depressed, and a fog of uncertainty around government-sponsored safety nets, there should be enough out there to scare people into saving.


More on and MSN Money:

Jun 25, 2012 7:59PM

I have personally looked into many many people bank accounts who do NOT have any savings. However, I see soooooooooooooooo much waste in their spending it is quite sad. They are just so damn financially illiterate. If we did a proper forensic financial analysis of most peoples accounts, they really COULD be saving.


They are just too lazy, too dumb and know someone (taxpayers) will bail them out when their times comes.


I say, support Darwinism and let them drown............. It will help the US gene pool.......

Jun 26, 2012 7:57AM

Just a few common sense quotes by Thomas Jefferson that should apply today:


"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."


"To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves and abhors is sinful and tyrannical." 

"We may consider each generation as a distinct nation, with a right, by the will of its majority, to bind themselves, but none to bind the succeeding generation, more that the inhabitants of another country."
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
"My reading of history convinces me that most bad government results from too much government."
"A government big enough to supply you with everything you need is a government big enough to take away everything that you have.... The course of history shows that as the government grows, liberty decreases."
Jun 27, 2012 11:05AM
We have emergency savings that should last about a year if things go completely south with our jobs.  I've got no illusions about job security - one quarter of missed numbers for my company and I'm sure the axe will come a-swinging down at any number of necks, including mine.

We also are paid up a full 6 months ahead on our mortgage.  That's right, we have given Bank of America a great deal of interest money in advance.  It makes ZERO financial sense, but man, the peace of mind it adds is priceless.  I look at it as a "things have gone so bad that we now have to sell and live in our car" buffer, giving me at least 6 months to get out from under the house without simply walking away.

What interesting times we live in!
Jun 25, 2012 3:27PM
No mention of putting emergency funds in Certificate of Deposit accounts, which are not liquid and time locked (you can break them with a penalty in an emergency).
Jun 27, 2012 8:09AM

I know people who's spending habits are so out of line with their earnings, it's laughable.  It's far easier to complain about saving money than to actually do it.  It's always possible to save a bit....always.


I agree with BankerBudd down below.

Jun 27, 2012 10:43AM
I do have emergency savings that is sufficient to cover a year of expenses.  As suggested in the article, a small portion of each check is automatically deposited separate from checking.  It grew slowly over many years, but reliably. It, along with disability insurance, is the cornerstone of a healthy financial house.  It's sole purpose is to guard retirement savings from being raided due to unusual events and surprise expenses (which do and have happened).  It has performed that purpose flawlessly so far.  Secondary purpose is yield.  Yield is not the critical function or goal, however, about 60 percent of the funds are occasionally invested in conservative 3 to 4 percent dividend paying blue chip stocks in a self-directed online brokerage account. Always a good portion immediately available, so never ever put all your emergency fund in the market.  This helps counter some of the buying power erosion effect of inflation.  Another choice which is safer, but yields much less, would be using a laddering strategy investing in 2 yr CDs, investing 1/24th of any emergency account, every month for 2 years straight and keep that cycle going. This plan put in place by a middle class member of society, grinding patiently away, only debt happens to be five years or so left on the mortgage, no fancy financial advisor needed.  There's a nice sense of satisfaction being able to say "I'm no where near rich (that is not my goal), but I firmly believe I'm doing just fine - thank you." 
Jun 26, 2012 6:00PM

Although govt safety nets exist, most will find them almost non-existant - subsidized food of $10 a month, as little as $20 in food stamps, maybe medicaid if disabled, maybe heating assistance, reduced cost housing and qualify for assistance at the charities in town. It can take 2 years to get some of these kinds of assistance. To qualify, you must have an income below $1100 a month in some low-cost-of-living states.


Welfare as known in the 1990s ended. A family unit might get $350 a month aid over a maximum 5-year period NOW plus entitlement to assistance listed above.


The current assistance system makes almost everyone a dependent or 2-3 job single parent. Plan for failures and disasters, they always happen and you provide the only assistance that exists to keep you independent.

Jul 1, 2012 11:20AM
Many people don't put a penny into any type of emergency fund but continue to enjoy cell phones (with data and messaging plans of course), cable, dining out, bar tabs,etc.  Then they blame the banks when they lose a job and the house gets foreclosed on.
Jul 1, 2012 12:30PM
I think we all agree that having an emergency fund is critical.  What hasn't been discussed is when one spouse is a saver for the eventual rainy day and the other has the "can't take it with you" mindset.  It is a constant struggle to maintain a balance.
Jun 27, 2012 10:34PM
Gary, you may want to click on the story above - "When your parents die broke".  Just sayin.
Jun 27, 2012 5:24PM

Yep shes called MY MOM!

88 years old and shes also my $401K!

Hey you want the truth -There it is!

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