Having a support structure to rescue you when you stumble might help mitigate the financial impact of unanticipated bills. In a challenging economy, though, Americans’ emergency reserves are suffering.
According to Bankrate’s Annual Emergency Fund Report, 68% of Americans are concerned that if they lost their principal source of income, they would be unable to afford their living costs for even one month.
In addition, the majority of U.S. individuals (57%) are now unable to pay a $1,000 emergency bill. When analyzed by group, Gen Zers (85%) and millennials (79%) are much more likely to be concerned about covering an unexpected price.
Why Powell (correctly, in my opinion) is so focused on reining-in inflation. Here is an update. It is far worse than the 40% rate I often use.
Creating a booming wealth effect will not help these people stretch their dollars further.https://t.co/T26s915bQW
— Jim Bianco biancoresearch.eth (@biancoresearch) January 29, 2023
Saving Less
There are several reasons why Americans save less in their emergency reserves.
74% of respondents identified inflation as the primary factor. While the inflation rate is starting to moderate, it still sits at 6.5% for the twelve months ending in December 2022.
This is much higher than the 2% rate that analysts believe is required to keep the economy functioning correctly.
Other factors contributing to a decline in savings were rising interest rates (68%). The Fed hiked interest rates seven times in 2022 in a bid to curb inflation.
Consumers are indirectly impacted by the Federal Funds rate. This influences interest rates on consumer goods such as credit cards, housing, mortgages, and college loans, and yields on savings products, such as high-yield savings accounts, certificates of deposit (CD), and more.
Over forty percent of respondents mentioned changes in work or income as the reason they reduced their savings.
The most recent unemployment report indicates that the jobless rate decreased to 3.5% in December 2022, but growing prices have triggered widespread layoffs among even the largest enterprises.
Credit Cards and Rising Interest Rates
So how do Americans pay for unexpected expenses? They are more reliant on their credit cards.
The research revealed 25 percent of respondents would incur credit card debt to fund a $1,000 emergency need and repay it over time, a record high since polling began in 2014.
The Household Pulse Survey found more than 35% of households used credit cards or loans in Dec. to cover household needs. pic.twitter.com/rhercrQWgk
— THE SHORT BEAR (@TheShortBear) January 30, 2023
Rising interest rates have a positive and negative impact on your capacity to save. On the one hand, a hike in the Federal Funds rate increases the cost of borrowing and, consequently, the expense of carrying debt.
The annual percentage rates (APRs) on the vast majority of credit cards, for instance, are variable, indicating they fluctuate and are vulnerable to fluctuations in the federal funds rate.
When your APR increases, any interest costs you receive for holding a balance will also increase, making it more difficult to pay off your debt.
On the other hand, higher interest rates affect more than simply debt. In many instances, savings rates will also rise, making it an ideal time to create a high-yield savings account or certificate of deposit.
There is no telling when any of this will change or get better.
This article appeared in The Political Globe and has been published here with permission.
