It’s been six years since the recession ended, and a big chunk of consumers still can’t bail themselves out of credit card debt.
Nearly one-quarter of Americans (24 percent) owe more money on their credit cards than they have in emergency savings, according to a survey that accompanied Bankrate’s February Financial Security Index.
This proclivity is problematic. Credit cards charge higher interest rates than savings accounts pay, which makes it harder for those Americans to climb out of debt.
“From a purely financial standpoint, it makes more sense to pay down that high interest rate” before you start to save, says Kelley Long, member of the American Institute of CPAs.
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But “not having an emergency fallback fund is just a first-class ticket to getting further into debt,” Long says. Its absence increases the odds that you’ll need to open new loans to cover unexpected expenses, such as car repairs, or if you lose your job.
Bankrate’s latest survey did find that a majority of Americans are finding ways to save. Fifty-eight percent of consumers said they have more in emergency savings than credit card debt. That’s in line with similar Bankrate surveys dating back to 2011. Americans, it seems, haven’t gained much ground on the savings front, even as the economy slowly improves.
The level of savings in this country “is still low,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “Even in the absence of credit card debt, the majority of households don’t have enough emergency savings to cover three months’ worth of expenses.”
Just not a priority
The lack of a savings boom could be related to lingering effects from the Great Recession.
“It’s difficult for people to really move the needle on savings when their income hasn’t grown,” McBride says. But consumers should also share some of the blame: “Savings is not a high enough priority for American households.”
People “don’t plan properly,” Long says. They “tend to underestimate what their lifestyle costs are” and dip into a savings account for nonessentials, such as a best friend’s wedding or a seemingly overdue family vacation.
This tendency is unfortunate because other data show a majority of Americans are likely to experience an emergency over the course of a year. According to the National Endowment for Financial Education, or NEFE, 63 percent of consumers said they incurred a major and unexpected expense last year, such as medical bills, moving costs and housing repairs.
Bankrate’s survey was conducted Feb. 5-8 by Princeton Survey Research Associates International and included answers from 1,003 adults in the continental U.S. The survey also found:
- Senior citizens (ages 65 and over) and millennials (ages 18 to 29) were the least likely to have more credit card debt than savings.
- Consumers in higher income brackets were, unsurprisingly, more likely to save. Among the highest earners in the survey (those with incomes of $75,000 or more), 73 percent said they had more money in their emergency savings than they did credit card debt. In comparison, only 48 percent of Americans making under $30,000 had more savings than credit card debt.
- College graduates (3 percent) were least likely to have no emergency savings and no credit card debt, compared with Americans with some college (11 percent) or a high school education (21 percent).
Anatomy of a savings account
The primary goal of an emergency savings fund is to provide a source of spare cash for those (hopefully) rare times you really need it. Experts say you should try to save enough to cover three to six months’ worth of basic monthly expenditures.
If that’s too high of a hurdle, it’s OK to start with a smaller savings target. For example, you may aim initially to save as little as $500.
“That’s not going to cover very much,” says Paul Golden, spokesman for NEFE, but “what you’ve done is you’ve shown yourself you can set and achieve a smaller goal, and you can achieve more from there.”
Backup funds, designed to cover your rent or mortgage, utilities and food expenses, should be stored in an account that can be easily liquidated. You could open a simple savings account or a short-term certificate of deposit, says Kevin Gallegos, vice president of Phoenix Operations for Freedom Debt Relief, a U.S. debt resolution company.
“You don’t want to tie it up in a rental property,” he says. But you don’t want to make it too easy to access the funds either.
“Put it in an account that’s different from where your current account is so there’s enough delay between transfers,” Long says. This strategy can help minimize the odds you’ll tap the funds for non-emergencies.
Ways to save
To jump-start your savings, arrange to have a small amount of your paycheck — as little as $25 — directly deposited into your designated emergency fund.
“If you don’t see it, you’re never (going to) miss it,” Golden says.
Beyond that, track your spending for a month to see what items you can cut out of your budget. Giving up that morning coffee or Saturday night out could easily help bolster your savings.
“Save $5 or $10 a month if that’s possible,” says Christie Barfoot, director of counseling services for nonprofit credit counseling agency Take Charge America. “Even a little bit of money in savings does add up over time.”
You could also use this tax season as an opportunity to reboot your finances.
“Take at least half of your tax return and put it in your emergency savings, and take the other half and pay down some of the debt that you have,” Barfoot says. This move could help you break the cycle of debt and provide a more solid financial cushion.