Recently we learned that the top financial resolution for Americans in 2021 is to boost their savings. For many people this means increasing the amount of money they regularly contribute to 401(k)s and other tax-advantaged retirement plans, but steps should also be taken to shore up short-term savings this year. Indeed, an updated Bankrate poll found that only around four in ten U.S. adults could cover a surprise $1,000 expense with the money currently in their emergency fund. Other respondents said that they would instead need to rely on credit cards, personal loans, installment plans, borrowing from family or friends, and slashing spending elsewhere to help cover the sudden outlay.
What is worse is that $1,000 is probably too conservative of an emergency fund goal to have considering that the median amount of the largest single emergency expense adults in a separate Bankrate survey experienced recently was $1,750. Further, when viewed over the course of a full year the typical respondent had a total of $3,750 in unforeseen outlays, and nearly a third of surveyed adults said their aggregate emergency spending exceeded $5,000. While such figures suggest that too many Americans are alarmingly ill-prepared for a sudden financial setback, the responses are also not significantly worse than what was seen in prior surveys. This is encouraging given the numerous economic disruptions caused by the pandemic in 2020 and is likely in part a reflection of the CARES Act and other fiscal relief provided. More importantly, with the rollout of several vaccines (facilitating a full economic reopening) and the potential for more stimulus in the year ahead, only 14 percent of surveyed adults expect their personal financial situation to deteriorate in 2021, compared to 44 percent who anticipate improvement relative to 2020.
As a result this year could be another great opportunity for many Americans to finally start growing their emergency fund and in turn become better equipped to weather an unexpected hardship without having to dip into their long-term savings. Moreover, it is generally considered a good idea for younger Americans to leave their retirement assets untouched because accessing these funds early not only diminishes the compound growth potential (less money to invest and reinvest) but can also be accompanied by a penalty. For example, withdrawing money from a 401(k), IRA, or similar account before the age of 59½ will result in a 10 percent tax penalty, apart from a few exceptions. To help grow your emergency fund and avoid the need to tap into your retirement assets ahead of time, an earlier Bankrate analysis recommended the following: “Automate your savings so 5 to 10 percent of your paycheck goes into a savings account. Increase your contributions anytime you receive a raise. Train yourself to put extra cash into your emergency fund until you have hit one month worth of savings — then two, then three and so on.”