Most U.S. Investors Have Emergency Funds

Most U.S. Investors Have Emergency Funds
The vast majority of American investors say they have an emergency fund they can use in case they suddenly find themselves without income. Retired (83%) and nonretired (80%) investors are about equally likely to report having such a fund, according to the June 30-July 11 Wells Fargo-Gallup Investor and Retirement Optimism Index survey.

The survey is conducted quarterly with Americans who have $10,000 or more of investable assets. Roughly 40% of American adults meet this definition.

Emergency Funds Place Second Among Reasons to Save Regularly

While nonretirees and retirees are most likely to say saving for retirement is their top priority, building an emergency fund comes in second among both groups. Forty-one percent of all investors say their most important priority for saving on a regular basis right now is retirement, with 31% of those already retired continuing to do so. Building an emergency fund comes in second, with 24% of all investors -- including 22% of nonretirees and 29% of retirees -- saying it's their top saving priority.

Half of Investors Say Emergency Fund Will Last Six Months or Less

While most investors have an emergency fund, about half of those who have such a fund say they could exist six months or less on this money before they would be in serious financial jeopardy. Another 18% say they could last up to a year. Half of retirees who have such a fund could last more than a year, while 23% of nonretirees say they could last that long.

Most Hold Their Emergency Fund in Highly Liquid Assets

Almost by definition, an emergency fund must be relatively easy to use immediately without significant penalty. The favorite place for investors to keep "most of" their emergency fund is in a savings account, at 42%. Another 20% keep most of their emergency money in short-term CDs or money markets. Fifteen percent hold their emergency funds in stocks or bonds.

Implications

One difficult lesson of the financial crisis is that when property values are plunging and jobs are disappearing, credit tends to dry up. That is, credit lines make a lousy source of emergency funds since they tend to disappear when most needed. Given that unemployment in the U.S. remains above 8% and underemployment is at about twice that level, and many more Americans are worried about losing their jobs, it is not surprising that investors who can do so are building real emergency funds -- cash or cash equivalents -- just in case the economy suddenly worsens.

In one sense, a stronger and more liquid investor balance sheet is good for the economy. Stronger balance sheets make consumers more credit-worthy over time and provide a substantial financial base for the overall economy. On the other hand, building emergency funds means less investor spending in the immediate term -- something that is not good for consumer spending overall or for short-term economic growth. Regardless, the good news is that when investors do feel confident enough to start spending more aggressively -- perhaps after the election and after the fiscal cliff issues are resolved -- there is the potential for rapid economic growth.
From: http://www.gallup.com
Updated: October 1, 2012