Most Middle-Class Americans Have $5K Saved: Here's Why That May Fall Short
KEY TAKEAWAYS:
A $5,000 emergency fund is great, but still may not be enough
Middle-class women have less emergency savings than men
A lack of savings can lead to debt and hardships down the road
Inflation is adding to the challenge of building an emergency fund
A new Transamerica report found that middle-class Americans have a median of just $5,000 in emergency savings. While having some cash set aside is better than having none, that amount may not be enough to cover a prolonged job loss, medical bill or other major financial shock.
Here's why $5,000 may fall short and how much you should actually have in emergency savings.
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Is a $5K Emergency Fund Enough for Most Americans?
If your emergency savings balance is around that $5,000 mark, it may be enough — but it may not be.
"There is no one-size-fits-all answer," said Catherine Collinson, CEO and president of Transamerica Institute. "A common rule of thumb is six months of expenses, but that may feel out of reach for many households. What's most important is understanding your expenses, assessing your biggest financial risks and steadily building savings that could help sustain you if your income were interrupted."
Instead of focusing on an arbitrary amount, Collinson said to ask yourself the following questions.
How much can I start saving now, knowing that it'll take some time?
If the unthinkable were to happen, what other alternatives do I have that I might be able to turn to?
Why Middle-Class Women Have Less Emergency Savings Than Men
The report found a stark difference in how much middle-class women and men have in emergency savings. For women, the median amount is $3,500, while for men, it's $10,000.
"Lower lifetime earnings continue to play a major role in this disparity," Collinson said. "The persistent gender pay gap, combined with time spent out of the workforce for caregiving and parenting responsibilities — which women are more likely to undertake than men — can leave women with less income available to save over time."
What Happens When You Don't Have Emergency Savings
Alarmingly, the report found that 14% of middle-class Americans have zero emergency savings and that share jumps to 18% for middle-class women.
"Without emergency savings, unexpected expenses can force people to turn to less favorable alternatives, such as high-interest credit card debt, borrowing from family and friends or tapping retirement accounts prematurely," Collinson said. "Those choices can create long-term financial consequences and, in some cases, strain personal relationships."
How Inflation Is Making Emergency Funds Harder To Build
The rising cost of living means you now need to save more to hit that six months of expenses threshold. And at the same time, it's harder to find wiggle room in budgets to save: the report found that 80% of non-retirees say inflation makes saving harder.
"Inflation has no mercy," Collinson said. "Living expenses are increasing, which means the amount we need to save for emergencies is also increasing. At the same time, people are feeling the squeeze of higher prices, making it even harder to set money aside."
How To Build an Emergency Fund When Money Is Tight
While saving six months' worth of expenses may seem daunting, building an emergency fund doesn't have to happen all at once. Consistent contributions can make a meaningful difference over time.
If you're struggling to save, Collinson recommended taking the following steps: "It starts with the budget and a clear understanding of income, expenses and available cash flow. From there, households can build multiple savings buckets simultaneously, including retirement savings, emergency savings and shorter-term goals.
"Nobody looks forward to emergencies, so it’s important to save up — even modest, consistent contributions can help build financial resilience over time," she added.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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