|Survey: Most Americans fail the
Fewer than four of 10 American adults have an emergency
fund to fall back on in the event of some financial disaster, according
to a nationwide Bankrate.com poll. And those that do have an emergency
fund aren't earning all that they could.
Consequently, a costly emergency, such as an unexpected
unemployment or major medical expenses, could send unprepared adults
into a financial tailspin that could lead to years of debt or even
"When it comes to the general public, most people
are absolutely not safe in a financial emergency," warns Certified
Financial Planner Benjamin Tobias, president of Tobias Financial
Advisors in Plantation, Fla. "Too many people are living paycheck
to paycheck, or they're people who don't manage their money well.
There are a lot of people who just don't know any better."
Financial experts say that everyone should have an
emergency fund consisting of at least three months of living expenses
in a liquid account, such as a savings account or money market mutual
fund. In most cases, the experts say, six months of expenses would
A little is better than none
The Bankrate poll indicated that while 70 percent
of the respondents have at least some money in a savings account,
certificate of deposit, money market account or a money market mutual
fund, only 39 percent have enough to cover three months of living
Another troubling finding is that many of the 39 percent
who have put aside three months' living expenses aren't getting
much of a return on their cash. Only 44 percent say the money is
in an account earning at least 3 percent. Nearly 30 percent have
the money in accounts earning less than 3 percent, and almost 7
percent aren't earning any interest at all. This is discouraging
when many online and traditional banks are offering high-yield
savings accounts of 4 percent or better.
That finding doesn't surprise Tobias.
"Many people when they first come to us have
large sums of cash sitting in no-yield checking accounts or bank
money markets with low returns. They're used to having a checking
account at a large commercial bank, and they don't pay any attention."
On a more positive note, those who have savings are
saving a lot. The average amount in the accounts is $21,938. However,
42 percent of respondents did not answer the question about how
much they had saved.
Earn more money
The poll shows the importance of not only establishing
an emergency fund, but making sure it's earning all it can.
Historically, the average annual inflation is about
3 percent, and 37 percent of the poll's recipients earn 3 percent
or less on their emergency funds, which has the same effect as losing
principal: They're losing buying power. By shopping around, people
don't have to leave money on the table.
The current national average for a money market account
yields a measly 0.79 percent average, according to Bankrate's weekly
survey of large lenders. But high-yielding MMAs now earn as much
as 5 percent.
The difference is dramatic: Someone with the average
size emergency fund -- $21,938 -- who parks it in the average money
market account earns just $173 in a year. The high-yielding fund
would earn $1,104, a difference of almost $1,000 per year. Whether
there's an emergency or not, that would make a big difference.