The Daily Item, Sunbury, PA

Business

March 18, 2013

The Color of Money: The case for rainy day funds

It's always good to have supporting documentation to back up the conventional wisdom.

Using data collected during the Great Recession, the FINRA Investor Education Foundation has produced some compelling evidence of what happens to people who don't have a rainy day fund for emergencies.

"Households that experience an income shock and have emergency savings are predicted to have a 9 percent chance of making a late mortgage payment, compared to 28 percent for households that experience an income shock and do not have emergency savings," wrote Gary R. Mottola, author of the FINRA report.

Not only that, you're nearly twice as likely to be involved in a foreclosure if you don't have an emergency fund. Some households are obviously more vulnerable than others. Those with incomes below $50,000 were 43 percent more likely to make late mortgage payments than their more affluent counterparts. Having dependents increased the likelihood of late mortgage payments by 48 percent.

It's not that any of this doesn't make sense. If you aren't making much money compared to the cost of living, it's hard to save. If you have children, their expenses also make it difficult to save.

There are a lot of organizations trying to assess how well people manage their money or make sound financial decisions. In a working paper for the National Bureau of Economic Research, Annamaria Lusardi looked at how financially capable Americans are. 

Not so much.

"The findings from this survey paint a troubling picture of the state of financial capability in the United States," Lusardi wrote. "The majority of Americans do not plan for predictable events such as retirement or children's college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks."

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