Chang, Hanna, & Fan, 1997

Chang, Y. R., Hanna, S. & Fan, J. X. (1997). Emergency fund levels: Is household behavior rational?, Financial Counseling and Planning, 8(1), 47-55.

Emergency Fund Levels: Is Household Behavior Rational?
Y. Regina Chang,(1) Sherman Hanna(2) and Jessie X. Fan(3)

Empirical studies have found that most households do not have recommended levels of emergency
funds. A three period model of optimal consumption is presented. The theoretical model suggests that
many consumers without recommended levels of liquid assets may be acting rationally. The model is
tested empirically with the 1983-1986 panels of the Surveys of Consumer Finances. Empirical findings
support the model in that households who could have expected to have decreases in future real income
were significantly more likely to hold adequate emergency fund reserves than those who could have
expected to have no decline in real income.

Key Words: Economic model, Emergency funds, Financial ratios, Liquidity, Survey of Consumer

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1. Y. Regina Chang, Assistant Professor, Department of Consumer and Family Economics, University of Missouri-Columbia, 239 Stanley Hall, Columbia,
MO 65211. Phone: (573) 882-9343. E-mail:

2. Sherman Hanna, Professor, Consumer Sciences Department, The Ohio State University, 1787 Neil Ave., Columbus, OH 43210-1295.
Phone: (614) 292-4584. Fax: (614) 292-7536. E-mail:

3. Jessie X. Fan, Assistant Professor, Family and Consumer Studies, University of Utah, 228 Alfred Emery Building, Salt Lake City, UT 84112. Phone:
(801) 581-4170. FAX: (801) 581-5156. E-mail:

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