What Happened to the Rainy Day Fund?

Hypothetical Situation: You’re about to travel to Indiana. You go to start the car – nothing. The battery is dead and a jump start won’t do the trick. It costs you $100 to buy a new battery. $100 you had not intended to spend this month.

Let me tell you a secret: Not so hypothetical. This happened to my friend last week.

Unexpected expenses like car repairs, medical bills, or home repairs come up all the time. However, 1 in 4 Americans don’t have any emergency savings. If you’re faced with job loss, need immediate dental or medical care, or incur some other unexpected expense, how will you pay for it?

  • Borrow from family or friends?
  • Take out an extremely expensive auto-title or payday loan?
  • Max out your high interest rate credit cards?
  • Push back buying a home a few more years?
  • Raid your children’s college fund?
  • Cash in your 401(k) early?

Rainy Day Fund Blog Size_Blog SizeEmergency Savings Account Basics
Emergency Savings is a financial life preserver that allows you to weather life’s difficult surprises like job loss, unexpected medical care, or unexpected car maintenance. Financial emergencies occur more often than you may think. A 2012 study of low and moderate income families by D2D found that 62% of them had suffered a financial shock in the past year. Most experts agree that a minimum of three months of household income is needed in an Emergency Savings Account as an adequate buffer to keep households afloat during unexpected financial emergencies. However, for those who do have emergency savings, only 22% have enough to cover expenses for 3 months. For those who struggle the most with unexpected emergency expenses, low-income households have reported that they need at least $1,500 in emergency savings. Additionally, people with even $500 of emergency savings reported that they felt less worried about their financial situation, had an easier time paying bills and rent or mortgage, and were less likely to have a balance on their credit cards.

Innovative Methods to Incentivize Emergency Savings Behavior
As part of a commitment to build financially security for all, access to emergency savings must be on our agenda. We are currently exploring ways to increase access to emergency savings in Illinois. Here are a few innovative programs and policies that have been shown to help people save specifically for emergencies:

  • Allow Individual Development Account (IDA) matched savings to be used for Emergency SavingsCalifornia’s Opportunity Fund found IDAs specifically designed for Emergency Savings needs were utilized by populations with lower income than those that had participated in a traditional AFI IDA program, with an average monthly income of only 36% of that of those who were in the AFI IDA program.
  • Pair Safe Small Dollar Loan payback method to an Emergency Savings Account. Banks and Credit Unions can ask for higher monthly payments on their safe small dollar loans where the additional money goes into a secured savings account accessible to the member after they payback their loan in full.
  • Transition Loan Repayment into funding an Emergency Savings Account after the loan has been repaid. Montana Credit Unions for Community Development transitioned interested members from finishing paying off a loan into paying into an emergency savings account.
  • Add-On and Stand-Alone Savings Prepaid Cards. D2D paired with Plastyc, Inc. to release two types of prepaid cards. 88% of the users of the prepaid card with the “Rainy Day Reserve” savings component as an Add-On feature reported that the card helped them cover emergency expenses. The Emergency Gift Card, a stand-alone prepaid savings card meant to be left in your wallet except in times of emergencies, is an interesting new concept soon to be pilot tested.

The Center for Financial Security (CFS) at the University of Wisconsin – Madison launched an Emergency Savings Project with the support of the Charles Stewart Mott Foundation. This initiative will highlight innovations in the field of emergency savings. The goal of the effort is to increase mechanisms for emergency savings, create effective policy proposals, or develop new financial products. Papers on these topics will be presented at a symposium later this year.

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2013 IABG Policy Agenda

As Illinois Legislators return to Springfield for the lame duck session, we are looking ahead to the 2013 legislative session. 1 in 4 Illinois households are asset poor and 1 in 2 households of color are asset poor – meaning they don’t have enough savings to support themselves during times of financial hardship. We believe that all people deserve access to the tools they need to build financially secure lives and in 2013 we will be working to make this a reality. In the New Year we will advocate with partners across the state on the following asset building issues:

  1. Children’s Savings Accounts: Kids with a savings account in their name are six times more likely to go to college – even when controlling for other variables like income and educational attainment of their parents. We believe that every child should have access to a college savings account. That’s why, over the next year, we will work to make the Illinois 529 Bright Start Program more accessible to students and parents. Barriers currently exist that prevent many lower-income families from accessing this effective college savings vehicle. Learn more about ways to address these barriers and make the program more accessible.
  2. Retirement Savings: All workers should be able to retire with dignity. Unfortunately, over half of private-sector workers in Illinois do not have access to an employment-based retirement savings account. In 2013 we will introduce legislation that will create an Automatic IRA program in Illinois. Learn more about the retirement savings gap in Illinois and how this program will address a growing challenge.
  3. Asset Limits: Families in Illinois seeking assistance through the Temporary Assistance for Needy Families (TANF) program cannot own more than $2000 in assets. This policy forces families to spend down retirement savings or college savings in order to make ends meet. Families that are required to limit their savings cannot achieve economic self-sufficiency or build financially secure futures. Six states have eliminated asset limits on TANF. In 2013, IABG will advocate for Illinois to follow suite.
  4. Consumer Protections: Payday and auto title lenders continue to strip wealth from communities across the state. In addition, dangerous and unclear financial products continue to enter the marketplace while thousands of our residents remain under or unbanked. In 2013 we will work with the Consumer Financial Protection Bureau (CFPB) and community leaders to advocate for increased consumer protections and access to safe banking and lending products.
  5. Credit Building: Credit scores have an impact on a person’s ability to access a loan, housing, insurance, and, often times, employment. Credit building is asset building. In 2013, IABG and the Social IMPACT Research Center will release a report on credit score disparities in Illinois and what it says about the growing racial wealth gap. To better contextualize some of the data, we will be working with communities across the state to highlight relevant experiences with credit scores and credit building. We hope this work can inform our policy agenda moving forward.

We look forward to working with you over in 2013 to implement these wealth building strategies. Keep your eyes open over the next couple of months. You will hear from us about ways that you can engage in these campaigns.

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