We know that for many people, a drop in their income or an unplanned expense can hit hard. In its latest Assets and Opportunities Scorecard, the Corporation for Enterprise Development found that nearly half of households -- equivalent to 132.1 million people -- are "considered 'liquid asset poor,' meaning they lack the savings to cover basic expenses for three months if unemployment, a medical emergency or other crisis leads to a loss of stable income."
I know what you're thinking. Really, they have to study that people need a rainy day fund. Isn't that common sense? Don't people know they should save in case of an emergency?
Yes, many do. Still, I like providing proof and, more importantly, a drumbeat of reminders that if you can manage to stash some cash, when a financial tragedy happens such as a divorce, health issues or, of course, job loss, you have some money to tide you over.
"While experts have long stressed the importance of rainy day funds, our study controls for other variables and isolates the positive effect that emergency savings can have when encountering a financial crisis," said FINRA Foundation President Gerri Walsh. "For example, having rainy day savings can offset the increased risk of late mortgage payments for low-income households with children when they experience an income shock. In short, rainy day funds can benefit households that are vulnerable to mortgage problems. Because the data we used was taken during the largest housing downturn in decades, we know that rainy day funds work in a financial storm."
So I asked Walsh: What now? What should people do with these findings?
Act, she said.
If you haven't already, automate the way you save. Have money withdrawn from your paycheck much as you do your taxes to build up your emergency fund. Keep it separate from the accounts you use to pay your monthly expenses. This has certainly helped people save for retirement and even college.