Building an emergency fund is crucial for financial stability and peace of mind. It helps you prepare for unexpected expenses like medical bills, car repairs, or home repairs.
In this post, we'll explore different ways people can build emergency fund savings based on a research paper titled "Do Tax-Time Savings Deposits Reduce Hardship Among Low-Income Filers? A Propensity Score Analysis." We'll provide you with actionable tips to help you build your emergency fund, with a focus on the study's results and implications for savers.
The Importance of Saving for Emergencies
Emergency savings are cash and other liquid assets set aside for unexpected expenses or income dips. They can help you buffer the negative effects of financial shocks and avoid material hardships.
Having an emergency fund also enables you to manage finances, avoiding bank overdraft fees, predatory loan products, high-interest credit cards, and alternative financial services. It may also enable households to accumulate and protect other assets that promote social and economic mobility.
Barriers to Saving for Emergencies
Building an emergency fund is a challenge for many people, particularly for those with low incomes. There are several barriers to saving for emergencies, including:
Low-income households often face difficulties in setting aside money for emergencies due to insufficient income. They may have to spend their income on basic necessities such as rent, food, and utilities, leaving little room for saving. Low wages, job loss, and underemployment can make it even harder to build an emergency fund.
High expenses can also make it challenging to save for emergencies. Many households struggle to pay for necessities like housing, healthcare, and transportation, leaving little room for saving. Unexpected expenses, such as car repairs or medical bills, can make it even harder to save.
Lack of Bank Accounts
A lack of bank accounts can be a significant barrier to saving for emergencies. Without a bank account, households may not have a safe and convenient place to store their savings. They may also miss out on the benefits of banking, such as access to financial products and services.
Lack of Trust in Banks
Some households may lack trust in banks, which can make it challenging to save for emergencies. They may have had negative experiences with banks in the past or may not understand how banks work. This lack of trust can lead to a preference for keeping savings in cash or other non-bank forms.
Self-control issues can also be a barrier to saving for emergencies. It can be challenging to resist the temptation to spend money on wants rather than needs. Without the discipline to save consistently, households may struggle to build an emergency fund.
Implications for Savers
Despite these barriers, there are several ways to overcome them and build an emergency fund. For instance, households can consider using their tax refunds as an opportunity to save for emergencies. Tax refunds, particularly the Earned Income Tax Credit (EITC), serve as the key source of large refunds for many low-income households. Because it is returned to filers in a lump sum, the annual refund may not be subject to the claims upon regular income or to constraints that prevent low-income households from saving.
In addition, households can automate their savings, cut expenses, increase income, use windfalls, reduce debt, and consider online banks. By setting a savings goal and implementing these strategies, households can overcome many of the barriers to saving for emergencies.
Tax-Time Saving Opportunities and Interventions
The research paper "Do Tax-Time Savings Deposits Reduce Hardship Among Low-Income Filers? A Propensity Score Analysis" explores the impact of tax-time savings interventions on low-income households' ability to save for emergencies.
The study was conducted in collaboration with Intuit Inc.'s TurboTax Freedom Edition (TTFE) web-based software program. The study focused on three interventions: no intervention, a non-targeted intervention, and a targeted intervention.
The study found that the targeted intervention group was more likely to save part of their refund than the non-targeted group. The rate of depositing into savings was greater among treatment group filers (7.6%) compared to control group filers (6.8%). Treatment group participants who received various messages had an average of $15 greater savings deposit.
Additionally, the study found that those who received a personalized savings goal tailored to their income level were more likely to save a portion of their refund than those who received a generic savings message. Furthermore, participants who were offered a savings account with an attractive interest rate were more likely to save than those who were not offered an account.
The study's results have several implications for savers. Firstly, personalized interventions that take into account the recipient's income level and savings goals are more effective than non-targeted interventions. Secondly, offering a savings account with attractive interest rates can be a powerful incentive for savers. Finally, tax-time savings interventions can be an effective way to encourage low-income households to build emergency savings.
Tips to Build an Emergency Fund
Based on the research here are some tips for building an emergency fund:
Use tax refunds as an opportunity to save: Low-income households can use tax refunds as an opportunity to save for emergencies. The study found that personalized interventions that take into account the recipient's income level and savings goals are more effective than non-targeted interventions.
Consider tax-time savings interventions: Tax-time savings interventions can be an effective way to encourage low-income households to build emergency savings. The study found that offering a savings account with attractive interest rates can be a powerful incentive for savers.
Automate savings: Set up automatic transfers from your checking account to your emergency fund savings account. This will help you save consistently without having to think about it.
Use windfalls: If you receive unexpected income, such as a bonus or a tax refund, consider putting it towards your emergency fund.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.