Emergency Savings by the Numbers

Any idea how investment risk is calculated? How inflation is affected by the recession and so-called recovery? New research shows that we know very little about those overwhelming financial terms and worse, we’re not doing as well as many experts believe.

In fact, we know less today and have less in terms of cash on hand than we did five years ago. A new report compiled by the Financial Industry Regulatory Authority Investor Education Foundation reveals the results from a five question poll that was conducted in late 2008 and then again, earlier this year. Our emergency savings by the numbers isn’t looking promising. In 2008, Americans got 3 of those questions right but by 2013, only 2.9 questions were correct. And by the way – we’d be happy to understand just how one arrives at a 2.9 number for a 5 question poll – but we’ll delve into that one later.

Emergency Savings Dwindling or Not?

Some argue our finances are improving. For many, their finances are indeed looking healthier these days. For others, though, times are still tough – and only getting tougher. Depending on which report you believe, our emergency savings are beginning to dwindle yet again. On the other hand, Chief Executive Richard Ketchum, whose agency compiled the first report, said in a speech presented last week in Washington,

People are finding it a little easier to make ends meet.

And then it becomes slightly confusing.

He said,

More respondents have rainy-day funds, which puts them in a better position to deal with life’s unexpected events…But there are still very significant concerns,

adding that debt continues to be a serious problem. No one can argue with that – for far too many, debt, and certainly credit card debt, continues to be an overwhelming burden – especially younger adults. What caught our attention, though, is the very different report that came out from AARP the same day. That report included this truth:

The deep recession ended four years ago…but the financial fallout remains for many older Americans…(who) are so strapped that if an unexpected expense like a major car or house repair arose in the next month, they would not be able to come up with cash to cover it. Perhaps those rainy day funds aren’t as impressive as some would believe. Remember – those aged 55 and up are generally the most conservative.

Older Americans

Not only that, but a growing number of these older Americans owe more on their homes than they’re worth. That’s creating what will surely become very long term problems for their adult children, too. These same adult children are likely making their own tough economic decisions as well.

The argument could be made that this report focuses on older Americans, aged 55 or more without much consideration given to younger adults and their emergency savings habits. That sounds good, but once you look at the rest of the FIRA presentation, you realize there’s a problem somewhere.

For adults between the ages of 18 and 34 years old, 43 percent “often” use high cost methods of borrowing, such as pawn shops or rent-to-own establishments. That average age as a whole is lower when it comes to those alterative borrowing methods, coming in at just 30 percent. Annamaria Lusardi, a professor at George Washington University and director of the school’s Global Center for Financial Literacy, makes the connection that younger people are becoming more familiar and accustomed to those alternative financial choices, or “non bank institutions”. The problem is that they’re often far more expensive. Certainly they’re not building emergency savings with overpriced loans, right?

Lower Incomes

And then there are reports that the number of us with emergency or rainy day funds is actually dwindling at a more alarming pace, which flies into the assertions made by Ketchum. In 2011, the number of Americans with no emergency savings was around 21 percent. One year later, that number had risen to 24 percent and today, it’s believed the number is actually closer to 27 percent. For those earning less than $30,000, the number is actually closer to 52 percent.

Younger adults are more likely to have lower credit scores, overdue credit card debt, little to no savings and other financial problems that will surely affect their buying power.

The one consistency in all of the new reports is that our patterns of spending and saving haven’t shifted to any major degree, other than fewer of us are able to save for an emergency. That is in direct proportion with what we’re earning and what we’re able to pay off in terms of our debt, whether it’s revolving debt or fixed expenses. Of course, job losses affect that (and a new report slated for release less than twenty four hours from now is not looking good. The May employment index is predicted to drop dramatically).

Financial Education

Ketchum’s report focuses on financial education, too. The report suggests it’s not a lack of confidence that keeps some from managing their finances, but a lack of financial education was at fault. The report explains those who graded themselves with “high marks” were actually incorporating those non traditional financing methods, like payday loans. Many also admitted they overdraw their checking accounts. The researchers found “a disconnect between self-perceptions and actions in day-to-day financial matters”, which isn’t surprising given the habits many younger adults are adopting. Few were unsure about risk management, diversifying and other financial lingo.

At any rate, and despite which dataset one chooses to believe, there’s no denying that true financial education is key. Financial literacy, explained Lusardi, is something that Americans could learn from our international neighbors who are now introducing it in middle school classrooms,

If you don’t do that, this is not something that grows with you or that people acquire by their daily lives.

What are your thoughts? Are you more inclined to believe the higher numbers associated with emergency funds or do you think more of us are actually in a position to healthily save for a rainy day? Share your stories with us.

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