Building up a stable cushion of cash you can rely on in emergencies seems daunting even in normal economic times. Add the steepest loss of Americans’ purchasing power in more than 40 years into the mix, and the task can seem next to impossible.
Prices have climbed on almost every consumer staple, rising 8.3% in August from a year ago — among levels not seen since late 1981. Everyday Americans thus have to make sacrifices with their money to make ends meet. Almost 3 in 5 (58%) said in a February Bankrate poll they had to cut back on spending because household items have gotten so expensive. Another 29% said they’ve had to dip into their savings, while 23% have had to take on credit card debt.
Skyrocketing costs can cause a major hit to one’s financial security. More than half (58%) of adults in a June Bankrate poll said they were concerned about the amount they have in emergency savings, up from 48% in 2021 and 44% in 2020. But some Americans are in a better position to handle inflation than others. Roughly, 4 in 10 (or 44%) have enough savings to cover an unplanned expense of $1,000, a vital fund in the face of higher prices, according to a Bankrate survey.
“Inflation raises prices and lowers purchasing power,” says Gabe Krajicek, CEO of Kasasa, an online financial services company. “Each one is being stretched further to cover daily needs, so there is less left over to contribute to savings.”
Making matters worse, the hunt for the best place to park your cash is a challenging one, with the average savings yield a modest 0.13%, according to Bankrate data.
Policymakers are already on a quest to cool inflation, especially at the Federal Reserve, where officials have been lifting the price of borrowing money to cool price pressures at the fastest pace in 40 years. But it comes with a price, slowing down the labor market and putting the U.S. economy at risk of a recession. Periods of high inflation also make saving for those rainy days harder, though even more so one of the most important financial steps a consumer can take.
“Having liquid funds available to you is always a good idea just because there’s going to be that emergency that arises,” says Kia McCallister-Young, director of America Saves, a nonprofit working in conjunction with the Consumer Federation of America. “It’s not an ‘if’ it’s going to rise — it’s a ‘when’ it’s going to rise.”
To help, Bankrate is here to walk you through crucial tips to both grow and preserve your emergency fund in the face of 40-year-high inflation, including offering insight on who might want to take careful consideration the most.
Key statistics
Latest annual inflation rate: 8.3% (August)
Peak inflation in 2022: 9.1% (June)
Annual wage growth: 6.7% (August)
Average savings yield: 0.13%
Highest inflation year on record: 23.7%, June 1920
Americans who have no emergency fund: 23%
Americans who have enough to cover at least six months of expenses: 27%
Households with more credit card debt than emergency savings: 22%
Americans who’ve had to dip into savings because of inflation: 29%
Americans who’ve had to take on more credit card debt because of inflation: 23%
Americans that can cover a $1,000 expense with savings: 44%
Total outstanding card debt: $1.14 trillion (September)
(Sources: Federal Reserve, Bureau of Labor Statistics, Federal Reserve Bank of Atlanta and Bankrate)
Tips on how to build an emergency fund
1. Find the best place to park your cash
Even though the average savings yield is a modest 0.13%, it’s not something you have to accept. High inflation underscores the importance of finding the best place to park your cash, so your money can work for you.
One avenue can be opening a savings account at an online bank, which can pay a more competitive yield because it has fewer overhead costs to pay than a traditional bank with branches. Some of the highest-yielding online banks are offering a 2% annual percentage yields (APYs) or higher, almost 16 times the national average.
But be careful: Never sacrifice yield for liquidity, especially considering the funds you’re stashing away would be your lifeline when facing unexpected expenses.
“The primary objective of cash is to have liquidity, and yield often takes a backseat,” says Greg McBride, CFA, Bankrate chief financial analyst. “The vast majority of American households need more liquidity, not less.”
2. Those with no savings: Start small — it’s more about forming the habit of savings
Experts typically recommend having a stockpile of cash worth six months of your expenses, making it a common North Star for many consumers. But that can seem like a daunting task for almost 1 in 4 Americans, who said in Bankrate’s June poll they had no emergency savings at all.
For individuals with no savings, the goal might be getting in the habit of savings, even if it’s starting as small as putting aside $5 a week, McCallister-Young says.
The best thing to do for people with no savings is to get into the mindset and commit to starting to build that cushion.
“Don’t put too much stress on yourself to try to save up three to six months,” she says. “The focus is to get on the habit of savings, and that’s going to look different for everyone.”
3. Those who already have some savings: Assess your spending habits to contribute more to your emergency fund
Individuals who already have some amount of money in their emergency fund want to find ways to keep growing it. That might come down to evaluating your expenses and seeing where you can free up some cash. Chipping away at the costliest lines in your budget will go a long way, such as finding roommates and cheaper housing, but those options might not be possible for all people.
McCallister-Young would rather call it a “spending and savings plan.” That’s because it’s a two-way street.
“Maybe right now, you’ve been putting $100 aside, and you might have to adjust that and bring it down a little because your money isn’t going as far,” she says. “Just see if you can tip the scales in your favor and be very specific and intentional.”
4. Make it as easy as possible to save
For those with regular income, it’s even easier to make saving a habit when the process is on autopilot. See if you set cash aside automatically, either by automatically deducting it from your paycheck or automating your transfers throughout the month.
“There will always be something that will be a headwind to your ability to save,” says Christine Benz, director of personal finance at Morningstar. “You can override those automated savings contributions if you need to, but I do think it helps enforce discipline in the savings process similar to the way we see 401(k) participants rarely tend to change their contribution rate once they set it.”
5. Build additional income
Seeking out extra income streams could also help you safeguard your finances as prices climb higher. See if there are any easy opportunities to make more money, such as selling clothes or monetizing your hobbies. If you have internet access, you might also be able to partake in the gig economy as a side hustle.
“There’s more opportunity than ever to get creative and find ways to add income,” McCallister-Young says.
6. Change your saving mindset
The best way to make saving a habit, even when it’s difficult, is changing the way you think about it. A cushion of cash doesn’t just prevent you from having to put an unplanned expense on a credit card with a double-digit interest rate, but it could also be what helps you take a last-minute vacation or meal out with friends. It also might be the sleep-well-at-night fund that helps you feel less stuck when the economy is uncertain and your job security is low.
“Savings gives you freedom to choose rather than the feeling of being stuck in a situation because you rely on a paycheck,” Krajicek says. “Rather than focusing on dollars and cents, remind yourself of the reason behind the action.”
