Why Don’t More People Have Emergency Savings?

Financial advisers and the media (e.g. Time and NY Times)  suggest the typical person should have 3 months of income saved in case of emergency. Emergency funds are important because people without these savings have no fall back when an unexpected bill, reduction in income or incredible opportunity arises. While having emergency savings is a good idea, relatively few people have this backup. Why don’t more people reduce their financial risk and put money aside?

The Ohio State University has been collecting data for the US government through the National Longitudinal Surveys (NLS) for many decades. The NLS is primarily designed to understand how much impact schooling and job training have on life’s outcomes. Some of the NLS data, however, are also useful for understanding financial choices. In 2012 one of the surveys (NLSYA) asked over 5,000 people between 17 and 44 years old if they had a rainy day fund that would pay for 3 months or more of their expenses. Two-thirds (66%) said they didn’t have a three month fund! Only one-third (34%) could survive at least 3 months if they had no income. These figures match other surveys that showed the majority of people in the USA don’t have at least 3 months of emergency savings.

Why don’t more people have emergency savings? The survey also asked each respondent how much money they had left over at the end of the typical month. Choices ranged from more than enough money left over to not enough to make ends meet.

The table below combines the survey answers of whether a person has emergency savings with the answers of how much money was left over at the end of the typical month.

Emergency Savings and Ability to SaveThe shaded cells in the top row of the table show half of all people who do NOT have emergency savings say they either had some money left over (27.8%) or plenty of money left over (5.5%). This means that a third of all young Americans have no backup even though they had leftover money they could have saved each month.

The shaded cells in the bottom row show a significant number of people who are just barely making ends meet (5.3%) or not earning enough income to pay their bills (0.4%) have nevertheless managed to save up enough to ensure a three month cushion. This means it’s possible to scrape together savings even when money is tight.

The data suggest one of the key factors in having or not having emergency savings is desire. It is not a lack of money.  Many people with extra money choose not to create a rainy day account.  Some people who cannot afford to create a rainy day account manage to create one anyway.  If you don’t have an emergency account, I encourage you to create one, no matter what your financial situation.  Having one ensures the next time an unexpected bill, reduction in income or incredible opportunity arises you will be prepared.

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