Emergencies do happen, but Americans are largely unwilling to pay for them.
Thirty percent of respondents to Bankrate’s January Financial Security Index survey said they or a member of their immediate family have experienced at least one major unanticipated expense in the past year. Among those respondents, most people (36%) said the biggest unexpected bill they received was $ 5,000 or more, according to the survey.
With so many of us facing financial emergencies, you might think we are all storing money so that we are covered if our rainy day arrives. But less than half of people say they would use their savings to cover a major unforeseen expense, according to the survey.
Only 40 percent of Americans would pay an unexpected expense of $ 1,000, such as a car repair or an emergency room visit, out of their savings. This figure is consistent with the range of 37 to 41% observed in surveys from 2014 to 2018.
More than a third would need to borrow money in one way or another – either with a credit card, a personal loan, or from family or friends. Another 14 percent would cut spending on other things, while 10 percent would find “something else” or not know what they would be doing.
A family’s emergency savings story
In early fall, John Allen strapped on his helmet, turned on his lights, and headed out for an evening bike ride.
It was a ride he took almost every night, said his wife, Hollie. But on September 24, the trip to Tyler, Texas ended with him lying in a nearby hospital room. A hit-and-run collision left John with a concussion, five lower back fractures and over $ 7,000 in medical and other related expenses.
Despite last year’s nightmare, Hollie, a 36-year-old accountant, considers her family to be lucky. John is recovering and even riding again after a 12 week break after the accident. And the family was able to avoid having to make difficult financial choices, like putting their medical bills on a credit card or an interest-bearing loan.
“I don’t know how we would do without saving,” she said. “We had to put it on credit cards and pay 30 percent interest. It would be a difficult hole to get out.
According to the Bankrate survey, 15% of those polled said they would turn to a credit card if they faced an unforeseen expense. The cards’ average annual percentage rate, or APR, was 17.66% in the second week of January, according to Bankrate data.
“Setting up an emergency savings account allows you to avoid having to resort to credit or personal loans, which can lead to high interest charges if a balance is carried over from month to month. », Explains Ravi Kumar, head of online banking services at CIT Bank.
“In addition, setting up a loan can take time, while savings are available almost instantly in times of urgent need,” says Kumar.
A financial emergency can happen to anyone
It’s tempting to think that financial emergencies won’t happen to us. But with 3 in 10 people claiming that they or a family member encountered an unexpected bill last year, playing the “it won’t happen to me” game is risky.
A rainy day can turn into a crisis for those without emergency savings, says Catherine Harvey, senior policy advisor at the AARP Public Policy Institute.
“A lack of cash savings can derail a household’s finances for a year or more,” says Harvey. “Some households may be forced to turn to expensive alternatives like payday loans; those lucky enough to have long term savings like a 401 (k) may have no choice but to withdraw the money sooner.
In some ways, it’s easier to save for the long term with employer retirement accounts that entice you to put money in with automatic recurring contributions, tax benefits, and possible business matches. .
“Such a savings vehicle does not yet exist for liquid savings. But a nationally representative survey by the AARP Public Policy Institute found that a payroll deduction rainy day savings program is a promising part of the solution to the savings challenge. emergency, ”Harvey said. “When asked if they would participate in such a program if their employer offered it, 71% of working adults aged 25 to 64 said yes.
How to save in an emergency
For now, one of the best ways to start saving is to ask your employer if you can split your paycheck into two accounts, automatically sending a small portion of each paycheck to a savings account. .
“There is no better line of defense than having a properly funded emergency savings account,” says Greg McBride, CFA, chief financial analyst for Bankrate.com.
“Consider an online savings account where you can earn a competitive return while still having access to cash when you need it. “
Using recurring direct deposits to a savings account helped Jillian Van Kampen, a 30-year-old business intelligence engineer, when she encountered plumbing issues – including a faulty water heater, pipes that leaking and toilets that keep running – in September. In total, repairs to his new three-bedroom home in Jeffersonville, Indiana cost him about $ 1,200.
“I was shocked at the amount of money, not shocked at the issues,” Van Kampen says. “I had a feeling we were going to run into problems. “
The combination of emergency savings and budgeting kept Van Kampen safe when his rainy day arrived. She was able to cover her unexpected bill without going into debt.
“I never want to find myself in a credit bind, where I borrow money and have to worry about paying it back,” she says. It is more worrying than anything for me.