Two economists crunched the numbers on more than 70,000 lower-income households nationwide, and they've come up with what may be the magic number for emergency savings accounts: $2,467.
If you Google, "How much money should I save for emergencies?" you'll get a lot of results telling you to set aside between three and six months of expenses. You may also see articles dictating how much money you should have saved by certain points in your life.
But according to new research, the bare minimum you need in case of an emergency is much lower than a quarter of a year's costs: It's $2,467. That number comes from economists from the University of Colorado and Diego Portales University in Chile who looked at 70,274 low-income households across the country.
Why Save $2,467?
It amounts to roughly one month of income for lower-income households. Of course, it won't protect you from all risks, and it's not enough to retire on, but saving at least that much significantly lowers a person's chances of experiencing financial hardship (like skipping rent and bill payments and taking out high-cost loans) if an unexpected expense occurs.
For the purposes of this study, "low-income" is defined as anyone whose annual income is at or below 200% of the poverty line. Economists focused on these households because behavioral studies suggest they see other savings models as unachievable, discouraging and counterproductive.
This comes after a Federal Reserve survey said almost half of U.S. households couldn't easily handle an emergency expense of $400. This is true for more than a third of Washingtonians.
"Within the District of Columbia, we estimate that more than 40% of households are 'liquid asset poor' — meaning that they are only one economic crisis away from falling under the federal poverty line," says Joseph Leitmann-Santa Cruz, executive director of Capital Area Asset Builders (CAAB), a nonprofit organization helping low to moderate income District residents save more money.
Challenges To Saving Money
While many District residents who participated in a recent focus group conducted by the Urban Institute are saving money for emergencies as well as long-term financial goals, nearly all noted that it was a struggle to save. Respondents listed various reasons for this: transportation expenses, student loan payments and high housing costs are especially hard on budgets. Others said unreliable income and unpredictable employment and hours have left them living paycheck to paycheck.
"Life happens, and we know that sudden expenses do occur in everybody's life. So, we need to set ourselves up for success, rather than knowing that we will fail," Leitmann-Santa Cruz says.
Families with young children face significant, ongoing child-related expenses — such as daycare, diapers, and formula — that can strain household budgets. Pair these with unexpected shocks and a lack of emergency savings and it's easy to see how these families struggle with financial instability.
Some employers, the survey found, offer small emergency loans and salary advances, but none of the participants were aware of such programs at their workplaces.
Leitmann-Santa Cruz says communities of color fare even worse. Fewer than 60% of those households have savings accounts, while 90% of D.C.'s white households do. That racial disparity is the largest in the country.
"We know that more than 63% of African Americans and more than 69% of Latinos have not even designated one penny for retirement," says Leitmann-Santa Cruz. "Those two racial groups within the United States will form more than 50% of the population by 2050. Then it will not be a brown or a black problem, it will be an American crisis."
Programs To Help You Save Money
As families across the Washington region struggle to stay above water, CAAB is working with the D.C. government on a matched savings program to assist the city's most vulnerable. It's one of several tools CAAB uses to empower residents hailing predominantly from Wards 5, 7 and 8. Other nonprofits, like AARP Foundation, have introduced programs to help their clients stash away money and plan for retirement.
The DC Opportunity Accounts program helps locals build their nest eggs with matching contributions to savings accounts. Participants make regular deposits of up to $1,500 in a savings account for a maximum of 18 months. In exchange, the city and private funders match up to four times that amount, up to $7,500. Mayor Muriel Bowser announced a $1.3 million investment in August.
"The [program] empowers residents to pursue their goals of going to college, starting a business, or purchasing a home, which in turn can provide them with pathways to the middle class," Bowser said in a press release.
The 130 current program participants also take part in financial training sessions. The hope is they'll walk away with an altered mindset on savings and apply the skills they learn for life.
"Some folks may have a hard time with credit, so it helps them improve their credit and helps them with saving and budgeting — not just for a house, but for all the other expenses that come along," says Stephen C. Taylor, commissioner of the District's Department of Insurance, Securities and Banking. Taylor's team oversees the program.
For many people, of course, the debate over how much money to save is strictly academic. Inflation-adjusted wages remain broadly stagnant as the cost of living continues to rise. When just making ends meet is a struggle, an emergency savings fund might not be a high priority, experts say not having one at all could lead to a dangerous and irreparable domino effect.