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Financial Literacy - Emergency fund
POLL
National poll results
The results are mixed. Americans are saving more than last year, but some are better off than others.
Creating an emergency fund

Women trail men in saving

Interest earnings improved
Emergency funds are starting to earn more interest, but nearly half of the accounts aren't even keeping pace with inflation. This year 56 percent of respondents earn 3 percent or more on their savings, compared with only 44 percent last year. Unfortunately that means nearly half of the accounts are in effect losing purchasing power, since historically 3 percent is the minimum rate to keep pace with inflation.

What rate do you currently earn on the account your emergency fund is in?

Source: Bankrate.com 2007

Again, women lag in this area. Only 49 percent of women earn 3 percent interest or higher while 61 percent of men do. Women are also much more likely than men not to know the amount of interest they are earning, with 19 percent of women unsure compared with 8 percent of men.

While it seems that at least some savers are becoming savvier, there's still a long way to go. Experts agree that interest is one area people can't afford to overlook.

Chatzky calls low returns on savings a common problem. "These folks could likely double the money they are earning on their money either by moving it to a more competitive account or by asking their own bank if they have a product that offers a higher rate of interest. 

"It's a move that takes less than an hour and can pay off substantially over years to come," she adds.

Everyone should earn at least 4.5 percent to 5 percent by saving in a high-yield money market account, says Epperson. "They're FDIC-insured, so they're completely safe. There's no reason not to have it," she says.

Bankrate Senior Financial Analyst Greg McBride attributes low interest holdings to the power of inertia. "Leaving money in a no-interest checking account is tempting if you're focusing on other things, but there's no need for that cash to sit idle. It can earn a competitive rate of return and still be available for unplanned expenses."

It seems that 25- to 34-year-olds are getting the message. They are most likely to earn a return that outpaces inflation and are the least likely to be earning no interest, points out McBride.

"I think part of that is explained by the 25- to 34-year-old set being an Internet-savvy group and there's a greater likelihood that they've shopped around or been exposed to the high-yield savings and money market accounts available via the Internet. This means that they are more likely to make sure their savings is earning an adequate return instead of languishing in a low- or no-interest account."

-- Posted: July 23, 2007
 
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