When a boat springs a leak and begins to sink, a floatation device will help keep your head above water. This same analogy can be used when it comes to an emergency savings account – it can be a financial life raft.
From a young age, I was encouraged to save 10% of any money I earned. The rest I could use for things I wanted. As I did not have the ability to buy on credit, I would also save for large ticket items – like a new 10-speed bike.
When I married, my husband and I continued the same practice, building emergency savings. Over the past 40 years, there have been countless times when emergencies or unforeseen expenses came up, and our savings account helped us financially keep our heads above water.
Building emergency savings and investing for retirement are the foundation for a secure financial future. In every plan we create, we focus on these concepts.
Unfortunately, we are seeing a change in the savings habits of Americans. The personal savings rate in April of 2022 hit 4.4%. This is down significantly from just a few years ago when the personal savings rate hovered around 7.5%. In fact, we have not seen a personal savings rate this low since August 2010, during the great recession. What you may find shocking is this rate includes savings allocated to investments, such as retirement accounts.
Here are some things to consider:
1) An emergency savings account should equal 3 to 6 months of your net income. The money saved should be used only for emergencies – loss of income, car repair, etc. In other words, something unexpected. This should not be used for something you want to purchase.
2) Retirement savings is money that is set aside today to cover expenses when you are no longer working. What percentage of income you should save depends on many factors; years until retirement, expected future income needs, and other sources of income such as a pension. A long-term rule of thumb is that 15 percent should be saved for retirement, and this can include your employer’s company match.
Knowing this, you can see why a 4.4% savings rate is alarming. Also concerning is that household debt is on the rise. When there are no savings to cover unforeseen expenses, people cover the expense using credit. This can compound the problem as paying off the debt increases monthly expenses.
Next time you review your monthly budget, ask yourself, “Do I have enough saved for emergencies?” If the answer is no, now is a great time to make building your emergency fund a priority.
Listen to a deep dive about having a financial life raft on the Power Up Wealth podcast.
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