Preparing for the Unexpected: Understanding Emergency Savings and Why It Is Critical to Financial Well-Being

One of the most important indicators of financial well-being is having money set aside for an emergency, yet too few US households do. And while overall household economic instability has grown in recent decades, it remains more common among lower-income households that have witnessed higher levels of income volatility and unstable consumption. This has made it even harder for low- and moderate- income households from all racial and ethnic backgrounds to save for emergencies. Therefore, an important policy goal to improve household financial well-being and further equity is to make it easier for households to build emergency savings.

This report is the first to provide a more holistic approach to understanding emergency savings, an important step to advancing policies needed to safeguard households from financial distress. It examines how five surveys measure emergency savings, whether savings rates differ across surveys, and what household characteristics are predictive of high emergency savings. It looks at surveys conducted between 2016 and 2019 that are publicly available and nationally representative to: ensure ease of data access, enable tracking of emergency savings rates both across the US and among subpopulations, and to avoid pandemic-related economic changes from influencing the results. It provides a holistic perspective on emergency savings by discussing the types of emergency savings, elaborating on their multiple dimensions, and exploring how different subpopulations use savings to prepare for financial emergencies.

The five surveys are: The Survey of Household Economics and Decisionmaking (SHED); The Unbanked and Underbanked Survey; The US Financial Health Pulse; The National Financial Capability Survey; The Financial Well-Being Survey (a onetime CFPB study).

Financial well-being and the complexity of emergency savings

One complication of studying emergency savings across various surveys is that because each survey approaches emergency savings uniquely and identifies different household financing sources, inconsistencies could exist in emergency savings rates. No single survey of American households captures all dimensions of emergency savings, nor do the surveys consider other financial obligations that influence savings ability and adequacy.

In addition, there is an added layer of inconsistency from respondents who potentially interpret questions in various ways. To overcome some of these inconsistencies, the report focuses on five key dimensions of emergency savings and on how each survey handles each.

Read the full report.

By creating a means of considering data from several surveys that use otherwise inconsistent approaches, the report identifies commonalities in the findings. Among them, just half of all households have set aside enough to cover expenses for three months, and fewer than three in four households could come up with $2,000 if an unexpected need arose. Over 30 percent feel they will face challenges in meeting even a $400 emergency expense. In addition, only a limited number of households have enough emergency savings to cover any large expense over a prolonged period of income loss, and many would need to rely on credit to pay for unexpected expenses.

Levels of overall emergency savings across population characteristics

Demographic characteristics, including racial and ethnic identity, age, and number of dependents will affect emergency savings. Overall, this analysis shows that African American, Hispanic, and younger households are more likely to have no emergency savings. Those affected by unemployment, in lower wage jobs, and with less education are more likely to have low emergency savings. Financial awareness also affects emergency savings that families accumulate, as does whether people have bank accounts, with lower savings levels among households lacking them.

To analyze household characteristics associated with high emergency savings, the report focused on survey questions that relate to core aspects of emergency savings and are measured in at least two of the five surveys—an exercise that helps create a consistent way to measure emergency savings. More specifically, across the five surveys, the report examines household responses to four distinct questions: whether a household (1) can meet a $400 emergency expense, (2) can meet a $2,000 emergency expense, (3) has set aside emergency savings equal to three months of household expenses, and (4) has set aside savings over the previous 12 months.

Read the report for discussions of emergency savings by racial and ethnic groups, age, education and income, and use of alternative financial products.

The way forward

Several policy and marketplace solutions can make headway in improving Americans’ preparedness for financial emergencies. One promising approach is a payroll deduction program specifically for emergency savings, offered through employers or other third-party providers. Such an approach can help savers consistently build balances with greater ease, and features that allow savers to stop or restart their deductions as their circumstances change give them control over their contributions.

This report details how policymakers and other stakeholders can improve the design of emergency savings policies, strengthen workplace short-term savings programs, and target policies that enhance household financial well-being and racial equity. Although the concept of emergency savings may seem straightforward, a deeper understanding of the idea reveals its nuances and multiple dimensions. Understanding these aspects is essential to assessing adequacy and designing effective solutions for improving emergency savings rates for Americans.