Financial advisor Kevin R. Chancellor, CEO of Black Lab Financial Services, has noticed a concerning money-management trend among not just his clients, but society in general.
“There is a historically low percentage of individuals with adequate emergency savings,” he said.
Chancellor‘s observations offer only anecdotal evidence — but there are plenty of facts to back him up.
A new GOBankingRates survey of more than 1,000 American adults revealed just how dire the state of financial readiness has become for the majority of the country. The results show that most people are woefully underprepared for the inevitable financial emergency — or, more likely, not prepared at all.
Emergency Savings: How Much Is Enough?
While some financial professionals still recommend setting aside $5,000 in case of an emergency, that dated advice ignores the fact that $5,000 means different things to different households. The better strategy is to calculate how much you need to get through a month and then multiply it until you can survive a quarter — or better yet half — of a year without any new income.
“It is recommended that you have at least three to six months’ of living expenses in an emergency savings fund parked in an interest-bearing account at your bank, in a high-yield savings account, money market, etc.,” said Jennifer White, senior director of banking and payments intelligence at J.D. Power.
Most Are a Long Way From 6, 3 or Even 1 Month
If the goal is to squirrel away enough money to survive for three to six months, most people have a whole lot of saving to do.
The GBR study revealed that half don’t have any emergency savings at all. Those who do are most likely to have $1,000 or less, which isn’t nearly enough to get the typical household through a single month — or possibly even a single vehicle breakdown or home repair. Another 11% have between $1,000 and $3,000.
On the other end of the spectrum are those who are sitting on a healthy cushion of $10,000 or more — but that group makes up just 9% of respondents. The remaining 14% are scattered somewhere between $3,000 and $10,000.
Across the board, men are more likely to have emergency funds than women and, when they do, savings that are padded with a sufficient amount or something close to it. Older Americans ages 55 and up are more likely to have bigger emergency funds than younger savers.
Dangers of Insufficient Savings: The Money Has To Come From Somewhere
So, if half have nothing saved at all, and those who do are most likely to have just a few hundred bucks, how will they deal with a crisis that only money can solve when one arises?
Only about one-quarter would be able to rely on their emergency savings. Another quarter would be forced into debt and about 15% would have to tap their non-emergency savings. About 11% would have no other choice but to sell investments or tap their retirement funds, which comes with all kinds of penalties, fees and future financial insecurity.
More than one in five — about 22% — would cobble together a plan involving some combination of all of those options, none of which are particularly appealing.
Bridging the Gap Between a Few Hundred and a Few Months
If you’re among the majority with nothing or next to nothing saved to bail you out when trouble strikes, don’t panic — but do start planning.
“Take the time to learn about where your money is being spent today and then adjust your savings to meet those needs,” said White.
Free emergency savings calculators to help you identify your personal number are easy to find online. Just input your non-negotiable expenses like housing, utilities, transportation, food, healthcare, child care and alimony. The calculator will give you a dollar figure for a one-month safety net, which you can then multiply by three, six or whatever number of months gives you peace of mind.
Your Bank Offers Useful Tools, so Take Advantage of Them
No matter where you keep your money, your financial institution can probably help you tailor a custom-built strategy for your lifestyle, income and expenses that’s more thorough than what you’ll get with a simple savings calculator.
“Many banks offer free online or in-person assistance to help create a spending plan to identify what you need,” said White. “We encourage the use of free services offered by banks to help you track your spending, avoid fees, and automatically save what you can.”
That last part is key.
“Many banks are now offering automatic savings programs that allow you to set aside money into these accounts to help build your emergency savings,” said White.
Automation is about more than just convenience. Putting your contributions on autopilot removes the guesswork, human error and emotions that often foil even the best-laid savings plans.
“The best way to grow your savings is by automating your savings in a specific savings account,” said Tom Koesternen, a chartered financial analyst with The Guaranteed Loans. “When you separate your savings from the money you get automatically, you reduce the chances of dipping into the funds to cover expenses. It also makes you more disciplined.”
The Best Plans Start With Conversations
The study also offered insight as to why people might have such a hard time growing their savings. Money, it turns out, is just not something people like talking about — but talking is how families form financial plans.
Survey respondents were most likely to never or only rarely have discussions with their significant others and children about financial matters like building emergency savings. Several experts said that breaking down those walls is the first step to developing a strategy you can stick with over time.
Once you get started, remember — always strive not just to save more, but to learn more as you save.
“Once you have some savings built up, make sure you are learning about different account types that can help you earn more money off your hard-built savings,” said White.
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This article originally appeared on GOBankingRates.com: Here’s How Much Americans Have in Their Emergency Funds