Don’t be one of many Americans without ‘rainy day fund’ for emergencies

Every household knows it should have a healthy “rainy day” fund to tap when something untoward happens: think unemployment, a major car repair, medical setbacks.

Taking advantage of the good times to build savings also allows for seizing opportunities that might come along. Yet most households find it difficult to save.

The personal savings rate fell from an average of 12% in the 1970s to less than 2% in the mid-2000s before rebounding to around 5% pre-pandemic. The big factor behind the decline wasn’t consumer profligacy. The slowdown in household incomes (with the gap between income and spending bridged with borrowing) suppressed the savings rate.

However, the personal savings rate soared to 32% in 2020. Households accumulated cash from various government programs while spending fell with so many businesses shuttered. The question is, where would household savings land once the good times rolled again? (And yes, the economy is healthy with 42 consecutive months of job growth)

A recent report by senior economics writer Jeff Horwich at the Federal Reserve Bank of Minneapolis taps into various databases to learn more about the state of rainy day funds. The title — ”Amid a resilient economy, many Americans aren’t ready for a ‘rainy day’ ” — sums up the essence of his findings.

“New data confirm Americans are sliding back from our pandemic savings peak,” Horwich wrote.

Most illuminating is the Fed’s Survey of Household Economics and Decisionmaking (SHED). It showed that 54% of U.S. adults have enough savings to cover three months of expenses if they lost their primary source of income. (The data is from October 2023.) That’s down slightly from a year before and substantially below the pandemic high. The personal savings rate in May was 3.9%.

The savings glass is half-full and half-empty. Half-full because the proportion of “rainy day-ready” households seems to have stabilized, Horwich noted. Half-empty because younger adults, people without a college degree and parents with children at home are less ready to financially ride out an emergency.

There are ways to generate more savings. Households can automate funding their emergency savings as much as practical. Employers can set up retirement-linked emergency savings accounts for their employees (which the Secure 2.0 Act authorized). Policymakers can focus on encouraging more industries to improve wages, benefits and opportunities for advancement among lower-earning workers.

The return on investment: Increased household resilience and more opportunities to fund career and lifestyle shifts throughout a lifetime.

Chris Farrell is senior economics contributor, “Marketplace”; commentator, Minnesota Public Radio.