According to a June Bankrate report, more than one quarter of Americans have no emergency savings, the highest level since 2020. But do Americans with substantial income or savings need a rainy-day fund?
Financial advisors answer with a resounding ‘Yes.’
Life in America is certainly unpredictable. Recent turmoil amid an uncertain election cycle is fuelling concern about the country’s political and economic future. The destabilizing zeitgeist aside, other critical factors undermine Americans’ sense of security.
At-will employment laws mean workers can never be sure how long their job and salary will last. And unlike most advanced nations, the U.S. lacks a universal basic healthcare system, making a prolonged illness potentially costly.
It’s little wonder emergency savings are routinely touted as the first step for anyone looking to build financial resilience.
However, some fin-fluencers are bucking the trend.
For instance, award-winning personal finance writer Holly Johnson has no regrets about depleting her emergency funds. Johnson says she doesn’t need idle cash because she can easily access credit to cover unexpected expenses. If unable to put in on a card, Johnson has a substantial stock portfolio to dip into if required. While she acknowledges she can only raise cash this way by paying taxes, she believes the return on investment in stocks usually more than makes up for this extra cost.
As if that weren’t reason enough, Johnson and her husband have multiple income streams as business owners. This makes it easier to come up with the money for something when a situation arises.
Johnson’s approach throws doubt on the assumption that having a pile of cash is the only proper way to prepare for a rainy day, but how do financial advisors perceive this alternative strategy?
Safety First
An individual or couple’s liquid net worth will likely impact how they view the importance of emergency savings. While many struggling Americans would cherish financial security, those with significant assets may find such savings superfluous.
Some financial professionals see holes in Johnson’s emergency borrowing strategy.
“Relying on credit can be risky and isn’t a substitute for having some level of liquid cash,” says Zack Swad of Swad Wealth Management. “While the approach to emergency funds can vary based on wealth, the fundamental need for liquidity and security remains.”
Swad is not alone.
“Everyone needs an emergency fund, no matter their wealth level,” says financial dignity coach and 7 Pillars founder Christine Luken. “I still recommend keeping six months of living expenses in a high-interest savings or money market account, whether you earn $100k a year or $1 million per year, so you don’t have to take on debt if a significant unexpected event happens,” Luken adds.
Others warn against raiding one’s stock portfolio.
“Cash needs often don’t occur at convenient times,” said Kevin Estes, financial planner and founder of Scaled Finance. “Avoid having to sell when the market is down by having some money readily available instead.”
An emergency fund helps investors avoid selling during a market downturn, as doing so can exponentially damage investment portfolios.
It’s not only their brokerage accounts.
Since the pandemic, many Americans are cracking into retirement nest eggs to siphon much-needed money. With the passing of the SECURE Act 2.0, individuals can access retirement savings for emergencies without penalties. This legislation may provide a lifeline, but misuse can devastate compounding long-term investments.
Dead Money?
Some against emergency savings say keeping cash in the bank is like burying it in an early grave.
Over the past 10 years, the S&P 500 has averaged an annual return of over 10%. The average interest rate on U.S. savings accounts during the same period is just 1%, which may mean potential returns from stock market investments outpace traditional bank savings’ returns.
Advisors believe there are ways to close this gap.
“Holding the funds in a money market or high-yield savings account can earn interest while remaining accessible,” said Estes. “A stable reserve can allow an investor to take more risk with their other investments.”
Tailored and Adjusted
Everyone’s situation is different, and so should their approach to emergency savings.
But there may be less rigid arrangements than insisting emergency savings stay in low-yielding, highly liquid savings accounts.
“For the more wealthy, it may be a combination of cash and credit that could meet their needs,” says Next Mission Financial Planning owner Mike Hunsberger. “I think the amount or percentage should be based on how likely their could be an interruption in their income, the amount of credit they have available, and how easy would it be for them to sell other assets to raise cash.”
Jane Mepham, founding advisor at Elgon Financial Advisors, says rising incomes increase living costs, so emergency funds should grow, too.
“It doesn’t matter your income; it needs to be enough to cover 3 -12 months of living expenses, which could vary wildly depending on your lifestyle,” said Mepham. “This is not wealth-building money, so I never consider it a lost opportunity when investing.”
Ultimately, consulted financial advisors unanimously agreed: everyone needs emergency savings in some capacity. So, while alternative strategies may work for some, having a cash reserve remains a cornerstone of financial stability for Americans today.
