Feb. 27, 2007 at 7:00 AM ET
Most Americans have no emergency savings, a new survey shows. The findings are consistent with a host of other surveys and government data that chronicle Americans' abysmal savings rate and, more important, our lack of preparedness for life's unexpected events.
Released Monday at a press conference designed to call attention to "America Saves Week," the survey by the Consumer Federation of America and other consumer agencies indicates that only 40 percent of adult Americans maintain separate emergency savings accounts. And about one-third of those savers have set aside less than $2,000 for that inevitable rainy day.
Even $2,000 is considerably less than the 3- to 6-months of living expenses that most personal finance advocates recommend as an emergency kitty. Coincidentally, it is exactly the amount Hurricane Katrina victims received in "expedited assistance" aid from the federal government in the days after the storm. Thousands of victims didn't get the benefits because of computer glitches and other technicalities, and many of them were left with nearly no means of support after their homes and jobs were washed out by the storm. The Katrina aftermath shined a harsh light on the financial preparedness of many American consumers.
The study mimics research released soon after Hurricane Katrina by the financial services firm HSBC, which found that four in 10 Americans don't even have enough savings in the bank to live for one month.
The new survey shows that poorer Americans and minorities are even less likely to have emergency savings. About 60 percent of those with incomes over $75,000 said they had emergency savings, but only one-quarter of those earning less than $25,000 did.
"There are many, many factors as to why situation exists, including lack of income, pressure to spend, the easy availability of credit, and pessimism about being able to save," said Stephen Brobeck, executive director of the consumer federation. "But the large majority of low- and moderate-income households can afford to save. And it's important to explain to households how they can save."
Brobeck recommended a host of savings tips for consumers, including: directing employers to automatically set aside a small amount into savings accounts for emergencies, using part of their tax refund to begin a savings account or setting aside loose change.
"Our emphasis is on starting small, but starting," he said.
Financial fitness rarely discussed
Michael Benjamin, executive director of Family, Career and Community Leaders of America, said that in light of Americans' negative savings rate -- the Commerce Department said recently that Americans now spend more than they earn, and are saving less than at any time since the Great Depression -- it's important to begin a national dialogue on savings accounts.
"Financial fitness is one of the last things discussed in the family," Benjamin said.
George Barany, director of financial education for the consumer federation, said consumers should set aside a small amount for savings even if they find themselves deep in debt -- a concept sometimes called "pay yourself first."
"There is a psychological benefit in seeing an account grow," he said. "When people start saving regularly, we find after four to six months there is a psychological lift and they do get more enthusiastic about savings."
Like 'Telling somebody who is short to get taller'
But several personal finance experts said the savings suggestions rang a bit hollow.
"Families aren't saving because they don't have any money," said Elizabeth Warren, author of "All Your Worth." Telling people who are struggling paycheck-to-paycheck to save money is like "telling somebody who is short to get taller," she said.
Ideally, Warren said, consumers should spend no more than 50 percent of their income on basics such as housing and health care. A full 20 percent should be saved for emergencies and retirement, she said. But few families can afford that kind of split.
"This isn't about spending sprees at the mall," she said."The problem is the size of the mortgage, the cost of health insurance, the cost of child care. Any solution has to be aimed at the big expenses, not trying to nibble at the edges. ... The real differences come not by starting at the savings end but at the spending end."
Robert Manning, author of "Credit Card Nation," said that the evolution of easy credit in the form of credit cards during the past several decades has radically changed consumers' ideas about what constitutes a financial problem.
"It used to be when you had overspent at the end of the month," he said. "Now the perception is they have a problem when the bank won't lend them any more money."
'Pay yourself first' doesn't work
Manning said he doesn't think consumers would be moved to set aside $10 to $20 a week unless they saw such a plan as the start of something much bigger.
"Pay yourself first isn't a worthwhile strategy if that's the end of your strategy," he said. "People need to see a link (how saving) $10 week is really going to change (their) lives."
Manning also wasn't convinced in the practicality of the savings advice.
He said some low-income earners would be better off pre-paying their mortgages than setting aside money in a low-interest savings account, for example.
"There are lots of ways to save," he said.
Better answer: A line of credit
Liz Pulliam Weston, an MSN personal finance columnist and author of several books, including "Deal with Your Debt," also questioned the focus on shifting money into a bank savings account. Saving for retirement and paying down credit card debt are higher priorities then depositing funds into a traditional bank account, she said.
Weston advocates alternative preparation for dealing with emergency expenses -- consumers without substantial savings can apply for a line of credit with their bank, for instance. Getting a line of credit before a crisis hits enables consumers to shop for low interest rates and lock them in, as opposed to looking for emergency loans after a crisis, when options are sure to be limited, she said. Paying down credit card balances also frees up available credit for dealing with emergencies, she said.
She didn't dispute the wisdom of gathering up some limited sum -- such as one week's salary -- to keep on hand. But she said consumers should first "really start attacking their credit card debt ... and not divide their loyalties" by splitting off money to build a low-interest savings account balance.
There is universal agreement, however, that Americans' poor savings rate is a sign of trouble. Some financial experts call the data misleading, saying that money socked away in 401K retirement plans or increased equity acquired through rising home values aren't reflected. But the data still indicate that Americans are spending more than they make, a formula which obviously can't last.
"Too many families are living in a state where if the transmission falls out of the car it will send the family budget into chaos. Psychologically it's a miserable place to be," Warren said. "The negative savings rate should be a wake-up call."