A recent survey conducted by the New York-based consumer financial services company Bankrate.com reveals that 66 million Americans have put aside zero savings for an emergency of any kind. I think this raises a number of interesting questions.
There is a commonly held notion, often espoused by banks and financial analysts, that households should maintain a separate emergency fund that can cover at least six months of their normal expenses in the event of a financial crisis or other emergency. Of course, it is highly unlikely, if not next to impossible, that a family living in poverty could accomplish this task.
Furthermore, it seems clear that neither could the tens of millions of Americans who are classified as financially insecure pull together six months’ worth of household expenses.
Who, then, is able to achieve such a feat and ensure that, if things go wrong, they still have a fighting chance to avert complete disaster and maintain their quality of life? As you would readily assume, household income plays a significant role in the ability to put away an emergency fund — or, for that matter, any savings at all.
The Bankrate.com survey demonstrates that only 28 percent of American households currently have emergency savings that would see them through six months. Furthermore, the overwhelming majority of those who fit that category have annual household incomes of more than $75,000. This is in contrast to households earning $30,000 or less, most of whom have saved absolutely nothing.
There really isn’t anything earth-shattering about any of this. The math is pretty easy to understand; the more you make, the easier it is to save, whether you put the money into a regular savings account, an emergency account, or both.
In spite of this, many experts argue that even low-income households can take measures to maintain and increase their savings. Although this is true, it is nonetheless exceedingly difficult, particularly as living expenses unfailingly increase while wages have generally remained stagnant for decades.
In his 2012 book So Rich So Poor: Why it’s So Hard to End Poverty in America,” anti-poverty activist and scholar Peter Edelman demonstrates exactly how flat American wages have been since the 1970s. Edelman notes that, when considering the rate of inflation, real wages have only increased on average a little less than one-fifth of one percent each year during the last 40 years.
How, then, could any household, whether it is below the federal poverty level or even middle class, be expected to accumulate and maintain six months of expenses for an emergency? Greg McBride, chief financial analyst for Bankrate.com, agrees that it is not only difficult to save but takes a considerable amount of time for most families who do save, “especially because expenses grow faster than many Americans can save during the home-buying, family-raising years.”
When pondering this quote, I think it is important to bring attention to three additional issues. First, a federal survey from 2014 illustrated that most American households are not on pace to save enough for retirement, and nearly one-third of working adults have no retirement savings at all.
Secondly, most American households are unable to save enough to send their kids to college. There are nearly 44 million Americans today who owe well over $1 trillion in student loan debt.
And finally, a 2014 report in The Atlantic shows that in spite of the fact that more than 85 percent of Americans have health insurance, medical debt is “the number-one cause of personal bankruptcy and is responsible for more collections than credit cards.” The report further notes that 40 percent of all Americans are currently carrying debt related to uncovered healthcare expenses.
In considering these trends, 24/7 Wall Street’s Paul Ausick rightly suggests how difficult it must be to save for an emergency when there exist a myriad of other things that one must save for. So when wages do not keep pace as living expenses continue to rise — whether for common, daily expenses or for emergency, educational, health care or retirement needs — what will happen?
Perhaps this is why a number of experts have suggested that in addition to the 50 million Americans currently living in poverty, an estimated 100 million are one financial mishap from becoming poor as well. I wonder if there are not another 100 million or more that might be only two missteps from poverty.
Clarence Hightower is the Executive Director of Community Action Partnership of Ramsey & Washington Counties. Dr. Hightower holds a Ph.D. in urban higher education from Jackson State University. He welcomes reader responses to 450 Syndicate Street North, St. Paul, MN 55104.