Six weeks of take-home pay.
That’s how much cash families should aim to set aside to ride out gyrations in their income and expenses, a new analysis from JPMorgan Chase’s research arm finds.
The recommendation, based on an analysis of millions of Chase checking accounts, is considerably less than the traditional rule of thumb of three to six months of take-home pay.
But even so, most households fall short, the report found: About two-thirds lack the recommended buffer.
To cushion against a simultaneous spike in expenses and dip in income, a middle-income family needs about $5,000 in a rainy-day fund but has just $2,000 — a gap of $3,000. Lower-income families need about $2,500 but have just $700.
A smaller buffer, however — just under three weeks of pay — can help families get through a lesser jolt, from either a dip in income or a jump in expenses, the report found.
The findings were part of a report on income volatility that the JPMorgan Chase Institute published this week. The report examined inflows and outflows from 6 million active checking accounts over a period of about six years that ended in December. The checking account data was anonymous.
Americans’ lack of emergency savings has been a concern for years. The Pew Charitable Trusts found in 2015 that many families lacked funds to cover a $2,000 expense. And the Federal Reserve has repeatedly found that a significant share of households would struggle to cope with an unexpected $400 expense, although it reported in May that the percentage of households able to handle unexpected expenses had “improved markedly” since 2013.
But in the current long period of economic growth and low unemployment, it is especially frustrating that many families continue to lack a cash buffer, according to a report this month from the AARP Public Policy Institute. The AARP found that more than half of American households (53%) lacked an emergency savings account, including a majority of people over age 50.
While it’s easier for more affluent people to save, some low-income families do manage to set aside money while higher-income families do not, the AARP found. For instance, a quarter of Americans earning more than $150,000 a year have no emergency savings account, the report found.
Regardless of their income, families with no emergency savings are more likely to suffer financial hardship, said Catherine S. Harvey, the author of the AARP report.
Harvey cautioned that just because people didn’t have a specific emergency savings account didn’t mean they lacked a plan to deal with unexpected expenses — even if it was borrowing from relatives and friends. But it’s clear, she said, that more must be done to promote emergency savings to make families more financially resilient.
Emergency savings are “necessary to meet the obvious issues that arise on a consistent basis for all of us, whether it’s costs for our home, car or health,” said George Barany, director of America Saves, a campaign that is managed by the Consumer Federation of America.
One idea gaining traction is to help people contribute to emergency funds through their place of work, much as employees contribute to workplace retirement plans like 401(k) accounts.
Prudential Financial, for example, last year began offering “sidecar” saving accounts, which allow employees to contribute after-tax money for emergency purposes alongside their pretax savings in 401(k) plans. The program helps workers avoid taking out loans or hardship withdrawals from their retirement plan, which can hurt long-term savings, said Harry Dalessio, head of institutional retirement plan services at Prudential.
A dozen of its corporate clients offer employees the savings accounts, Prudential said, and 10 more are expected to add them by spring.
SunTrust Banks offers employees a $1,000 contribution if they complete a financial education course and make automatic transfers from each paycheck to an emergency savings account. (The accounts aren’t linked to a retirement plan and can be opened at any bank.) The goal is for each employee to build a $2,000 reserve to draw on as needed, said Brian Nelson Ford, SunTrust’s financial well-being executive.
A majority of the bank’s employees participate as part of its financial wellness program, which SunTrust also offers at cost to more than 200 other employers, including Home Depot, Waffle House, Chick-fil-A and Zappos.
About a third of the participating companies offer cash incentives to their employees, averaging about $250, Ford said.
Here are some questions and answers about emergency savings:
Q: What is the best way to build an emergency fund?
A: Many savings experts urge people to have a fixed amount from each paycheck automatically transferred to a savings account. That helps build a savings habit without having to remember to shift cash every payday, said Barany of America Saves.
But that approach might not be the best for everyone. The latest JPMorgan Chase research suggested that it might be more effective for some families to forgo saving when money is tight and instead save aggressively on “spikes” in income, said Fiona Greig, director of consumer research at the institute. Predictable jumps occur in the spring, when families get income tax refunds, and late in the year, when people work extra holiday hours or get year-end bonuses.
“You can give yourself a bit of a break, instead of trying to save during an income dip,” Greig said. Online banking technology can help customers set flexible goals, she said, like automatically moving more money to savings when their paycheck is bigger.
Q: What if saving six weeks of pay seems overwhelming?
A: Start smaller. Even modest savings of $250 to $750 can “significantly” reduce the likelihood that lower-income families will miss a utility payment or be evicted, research has shown.
Barany suggests an initial goal of $500 for a rainy-day fund. That’s enough to help out in a pinch. The average amount of delinquent accounts in collections, he said, is about $400.
And remember: Unlike a retirement fund, an emergency fund is meant for current needs. Draw on it when you have to repair a car or pay a doctor’s bill, then keep saving to replenish it.
Q: How can I easily move money into an emergency fund if my employer doesn’t offer a formal savings option?
A: Most banks make it simple for online customers to set up regular transfers from checking to savings accounts. You could also try one of the many apps — Digit and Acorns among them — that automatically save small amounts of money.
If you have direct deposit of your paycheck, you can ask your bank to divide your earnings between two accounts, whether or not you’re an online customer.
Barany said that 82% of American workers had their paychecks deposited directly into a bank account, but that just a quarter split their deposit into a nonretirement savings account.