Pew Research Shows Americans Not Saving for Financial Emergencies, Let Alone College
Posted By Eliana Osborn on April 19, 2016 at 9:26 am
America’s Savings Challenge led by the Pew Charitable Trust focuses on financial security and mobility—the cornerstones of what we think of as the American Dream. A series of three issue briefs highlights Pew’s extensive research on the state of family savings in the US. And as part of the initiative, Pew’s Erin Currier led a webcast discussion last week with government and private sector thinkers, discussing what savings looks like for today’s American families and the policies in place to try to improve financial health.
During the America’s Savings Challenge webcast, Leigh Phillips, CEO of the nonprofit EARN which focuses on micro-savings, noted that an attitude of saving is more important than having a specific amount of money in the bank. If you start saving, even very small amounts, it becomes a habit that can build confidence in your ability to handle finances.
Pew says a significant proportion of Americans have absolutely no savings. One-third of Americans have simply nothing ready for even the slightest financial bump that may arise. One reason brought up during the podcast? Inconsistent wages. If your paychecks or benefits change from week to week or month to month, saving becomes more challenging.
Tax time and starting a new job are two moments where people can start to think about saving and changing previous behaviors. Both open financial possibility for building an outlook from the here and now to thinking about the future. As Phillips says, “Lower income people can and will save when given the right opportunities.” Right now, with changing financial technology, barriers to savings are being reduced and innovations are making saving less daunting and more flexible.
Tara Watson, deputy assistant secretary of the US Treasury, said in the webcast that new financial tools are something the government should be involved in, not just private companies. Families without a safety net are a concern for everyone; Pew research has found 41% of American households do not have $2,000 immediately available to cover an emergency expense.
It isn’t just the poor who aren’t saving enough. The same Pew study identified how much each quintile of earners has in liquid assets. Americans in the top group have enough resources to last 52 days on cash savings; the lowest group can cover 9 days. The good news? Every income level has more savings available than they did in 2010.
Every kind of family faces economic shocks or strains. That can include pay cuts, car or home repairs, or medical expenses. Pew’s research reveals that the ability to cope with these shocks varies widely across ethnic and racial groups. According to Pew, the average white American family has just over a month’s worth of income in liquid savings, which they can use in the event of an economic shock. This is compared to 12 days worth for the typical Hispanic household and 5 days worth for the typical African-American household. According to Pew, 80% of people would turn to a credit card for a financial emergency. Beyond money, economic shocks have negative consequences for family stability in half the cases.
One of the biggest concerns about savings is paying for college; the reality is that few families can put away enough in 529 plans or other accounts to afford higher education expenses. While the debate over how to reform rising tuition continues, Pew’s focus on savings brings another dimension to the conversation, as CFED research shows children with at least $1-$499 in college savings are 3 times more likely to attend college and 4 times more likely graduate than those without any college savings.
Americans have increasingly turned to debt in the form of student loans to finance college degrees in the absence of savings. This coupled with the rising cost of higher education means larger debt loads, especially for low-income students, and less potential for saving and wealth building over a lifetime.
Watson from the US Treasury pointed out a paradox of living on a low income: life costs more. One example is how everyday items are more expensive if you buy them as you go, rather than in bulk. The poor simply can’t get a good deal on economy-sized items, thus spending more real dollars (and a higher percentage) on goods like toilet paper. Horror stories abound about bankruptcy caused by medical bills. Watson also referred to the Affordable Care Act as a ‘financial security plan,’ as it can prevent such crises from destroying a family economically.
Similarly, increased state and federal government involvement in promoting college savings could represent a way to help prevent students and their families from becoming highly indebted as they pursue higher education needed for today’s jobs.
What is clear is that saving money is not just a problem for those with low incomes. All Americans know they should be putting money away for potential calamities but they simply aren’t doing it.