According to the Federal Reserve, Americans should aim to have at least three months of expenses stashed away in a “rainy day” fund. Many financial experts recommend that consumers aim higher, encouraging savers to continue putting money away until they have at least 6 months of expenses available in liquid cash.
The prevailing wisdom behind the need for emergency funds is that they can protect your financial security in two ways. First, your emergency savings can help you cover unexpected expenses. And, second, it can keep you afloat during a period of unemployment.
A few months ago, many Americans may have thought that preparing for unexpected expenses was the only real reason they needed an emergency fund. But the coronavirus pandemic has made it abundantly clear that unemployment is a financial concern that we all need to prepare for as well.
CIT Bank makes building that savings easier, thanks to competitive interest rates and freedom from the fees banks usually charge.
So how will the events surrounding the coronavirus pandemic change the way Americans save money? What will savings habits look like moving forward through the remainder of 2020 and beyond? Here’s what the best data available tells us we should expect.
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About eight months before the COVID-19 crisis was shutting down the United States economy, Bankrate published its June 2019 Financial Security Index. And the survey discovered some worrisome savings trends.
According to the survey, only 18% of Americans would be able to live off their emergency savings for six months. That was the lowest response to that particular question that Bankrate had seen throughout the entire 9-year history of the survey.
An additional 25% of respondents said that they didn’t have enough money saved to cover three months of expenses. And, most concerning of all, the survey found that 28% of Americans have no emergency savings whatsoever.
In Bankrate’s Financial Security Index from just a year earlier, only 23% of respondents said that they had no emergency savings. And a much higher 29% of survey takers had said that their emergency fund could cover 6 months or more of expenses.
What’s so perplexing about these trends is that they took place before the COVID-19 financial crisis, during a time of relative economic strength and growth. In fact, 6 out of 10 respondents to the survey said they believed the current economy to be “good” or “excellent.”
It would appear that many Americans were being lulled to sleep by the prolonged period of economic stability and were discounting the need to focus on emergency savings. But, as we’ll see, the coronavirus would soon wake many savers from their slumber.
During a phone call with CNBC, Morgan Housel, author of “The Psychology of Money,” and partner at Collaborative Fund said he expects a “generation of supersavers” to arise from the coronavirus pandemic.
“I think it’s going to lead to a generation that is less interested in taking risk,” Housel said. “And they won’t mind if they’re leaving opportunity on the table because they’re just more and more interested in their downside protection than they were before.”
Recent survey data seems to back up Housel’s hunch. Despite the fact that so many households have experienced a decrease in income during these past few months, a Bankrate survey from April 29 – May 1, 2020 found that 19% of Americans had actually increased their savings during the crisis (the same percentage as those who said their savings had decreased).
The odds that a household had increased its savings during the pandemic rose with income level:
|Income Range||Percentage That Increased Savings|
|Less than $30,000||13%|
|$30,000 to $49,999||20%|
|$50,000 to $79,999||21%|
|More than $80,000||27%|
Millennials were the age group most likely to have increased their emergency savings during the crisis (24%). And, in a bit of surprise, the age group most likely to have experienced decreased savings was not the lowest income level but instead the $30,000 to $49,000 income range.
Budgeting and Expense Trimming Could Make Major Comebacks
If a larger chunk of the American population decides to start hoarding cash in the wake of the COVID-19 crisis, building budgets and trimming expenses are likely to play a major role.
In 2017, Discover surveyed 2,205 adults on their savings habits. Of the Millennials who said they were able to save more in 2017 than 2016, a whopping 56% attributed the growth to either gaining a better understanding of how to create and manage a budget or nixing a recurring luxury expense. Of Generation Xers who were able to save more, 52% said these two factors played a role in their success.
Another Bankrate survey (this one conducted from March 20-24, 2020) confirmed that Americans are already beginning to cut back on spending. The survey of 2,468 Americans found that 52% have reduced expenses due to concerns about the economy or stock market.
If you’re looking to trim expenses, here are our 92 ideas to get you started. And if you’re wanting to get serious about budgeting, here are our top tips. You may also want to consider downloading a budgeting app like Personal Capital or Pocketsmith.
Read More: Our full list of top budgeting tools
What Are Americans (Unfortunately) Unlikely to Change? The Bank Where Their Money Is Saved
Again and again, studies have shown that consumers are loyal to their banks to a fault.
A January 2020 survey from Bankrate found that the average person will keep the same checking account for 14 years. This is despite the fact that the average account holder at a bank or credit union is paying $7.69 in fees each month. And a study conducted by DepositAccounts in August 2019 found that an estimated 96 million people have never switched banks.
The DepositAccounts study also found that 42% of people think that large full-service national banks like Wells Fargo and Bank of America offer the best savings account rates. Most alarming, nearly half of the respondents to the survey didn’t even know how much interest they were earning on their savings account.
These statistics are concerning because they show that many Americans aren’t shopping around to find a bank that will give them the best return for their money. Many high-yield savings accounts today offer yields that are 15 to 20 times higher than the national average savings account rate.
Online banks, like CIT Bank, have especially led the charge when it comes to offering high yields on savings accounts and top CD rates. Many of these online banks also offer fee-free ATM access at tens of thousands of locations through ATM networks.
Deciding to increase your emergency savings this year is a smart move. But make sure that you choose a bank account that will pay you a fair rate for your hard-earned savings. You may want to start by comparing your current savings account APY with the rates offered by our top high-yield savings accounts.