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Emergency savings, or lack thereof, is one of the most widely discussed financial topics and it’s an area in which advisors can add material value for clients.
The concept is fluid, but there are rules of thumb. One of the most frequently mentioned defines “adequate” emergency savings as enough cash set aside to cover six months of expenses. That can work out to be a lot of money. Consider a theoretical example in which a person has $5,000 in monthly expenses – a reasonable sum when factoring rent or a mortgage, a car loan, food, utilities, other essentials and perhaps some consumer debt into the equation.
That means that person should have $30,000 set aside in emergency savings. Add to that, the conventional wisdom dictates that emergency savings should be in cash or a money market fund, not risk adds or even bonds, meaning there’s essentially no chance for capital appreciation.
Still, the issue of emergency savings is crucial and it’s one advisors should be taking an active role on. Data confirm as much.
Emergency Savings State of Disrepair
Bankrate’s 2024 Annual Emergency Savings Report calls attention to the flimsy state of emergency savings in the U.S.
“Nearly 6 in 10 (59 percent) U.S. adults are uncomfortable with their level of emergency savings, according to a new Bankrate poll. Before 2022, the percentage had been rising, from 37 percent in 2018 to 44 percent in 2020, 48 percent in 2021 and 58 percent in 2022. This year, it’s barely budged from 57 percent in 2023,” according to the research firm.
Even if the aforementioned six-month rule of thumb is cut in half, just half the Americans polled by Bankrate say they have adequate savings set aside to cover three months of expenses. Worse yet, 27% of those queried have no savings at all.
Those data points the need for advisors to get involved and while this is a sensitive subject, other data from the Bankrate study indicate many of those polled are trying to right their emergency savings ships. That could imply that those folks are receptive to professional advice.
“36% of U.S. adults are prioritizing both debt repayment and building emergency savings, as of January 2024 polling, as opposed to just focusing on one. That’s the highest percentage since 2018,” adds Bankrate.
Generational Considerations
As Bankrate notes, about three in 10 Americans have some emergency savings, but not enough to cover three months of expenses. Advisors should note that’s an overall number and there are important generational divides to account for.
“Today, that percentage is far higher for some generations, specifically Gen Zers. More than 2 in 5 (44 percent) Gen Zers have some savings, but less than would cover three months of expenses, the most of any generation,” observes Bankrate.
Conversely, baby boomers, not surprisingly, are best-positioned when it comes to emergency savings. That might be frustrating to some younger clients, but advisors can and should impart upon them that there’s no time like the present to bolster emergency savings.