For myriad reasons, Americans just don’t have much in the way of emergency funds.
Case in point: a 2016 study from Go Banking Rates says 69 percent of U.S. adults have less than $1,000 in savings. That’s up from 62 percent from a similar study in 2015.
Meanwhile, a Bankrate report finds that three in five American adults will face an “unexpected expense” this year (with car trouble, illness, and/or home repair topping the list.) Worse, 41 percent of those dealing with a short-term expense issue wind up taking the cash out of long-term savings, like retirement funds, Bankrate reported.
That begs two questions. First, why aren’t more Americans building an emergency funds, and what can advisors do to spur them along? Secondly, what can financial advisors do to steer their clients toward a reliable emergency fund?
“Those are good questions,” said Joseph Gissy, a financial advisor with Capital Management Services in Westlake Village, Calif. “I’m in the process of trying to get the word out, especially to the younger generations and millennial generations about why it’s so important to have an emergency savings account.”
The need for a sturdy emergency fund is certainly front and center, Gissy noted. The old financial rule of thumb called for at least six months of pay in case you lose your job and have to survive for a few months.
“However, I’ve found that the older you get, the more emergency savings you should have in the bank,” Gissy explained. “So that number should go up to one year’s worth of pay in your savings account.”
Not a Priority
A big part of the emergency fund avoidance issue is that people just don’t believe such a fund is a priority.
“Like all forms of savings, people prioritize immediate satisfaction over practical considerations and necessities,” said Ty Young, founder of Ty J. Young Wealth Management in Atlanta. “In many cases, while the economy turns around and the Trump trade drives the stock market up, most people are simply paycheck to paycheck, even in the middle class.”
Financial advisors can help turn that around, Young said, by offering familiar solutions: self-discipline, focus, put savings aside first before spending on other things.
Others agree, noting that financial advisors should educate their clients on why a savings fund is important and teach them to treat it for what it is -- emergency use only.
“Advisors should consider making it slightly less accessible to get into an emergency fund,” said Chris Felton, co-author, along with his wife Marlow, of the book “Couples Money.” “Also, advisors should explain the emotional security that it brings and how important that is to your overall financial wellness.”
James M. Matthews, CFP and managing director of Blueprint, a fee-based financial planning firm in Charlotte, N.C., takes a more direct approach with his clients.
“We place a major emphasis on our clients committing to save 15 to 20 percent of their incomes for emergencies until reaching around a year’s worth of income/expenses. Only then do we encourage them to save for other longer-term goals like retirement,” he said.
There are no excuses, Matthews said, especially if someone has assets on their balance sheet.
“They have options, yet Americans struggle with saving largely because it takes discipline and it’s easier to spend money than set it aside,” he said. “More importantly, people are unaware of how to get started so they just don't.”
Many clients are willing to do the work but need guidance around the right prioritization of their cash flow and help getting organized before starting a savings program, Matthews added.
Perhaps the best approach is take small, bite-sized steps to get clients more comfortable with an emergency fund.
“Advisors should set short-term goals with their customers to build emergency savings,” said Marc Johnston-Roche, co-founder of Annuities HQ in Toronto. “They should establish a pyramid-shape savings approach, with emergency fund at the bottom (the largest) and retirement savings in the middle. This approach shows how having an emergency fund should be a foundation in your finances.”
No matter what path money managers take, getting clients to view an emergency fund as a “financial foundation” is a noble goal.
But as financial advisors who broach the subject of emergency funds to their clients discover, that’s easier said than done.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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