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.

You Might Also Be Interested In...

Read our blog

2019 Legislative Roundup: Illinois Takes Steps to Help Families Build Financial Security

IABG advocates for policies that close the racial wealth divide, expand savings opportunities, and...

Read more

Racial Disparities Exist Across All Measures of Financial Security in Illinois

By Sarah Martin, Policy & Advocacy Intern for Heartland Alliance Prosperity Now’s annual...

Read more

Part 2: Increasing Financial Inclusion for People with Disabilities

By Sarah Martin, Policy & Advocacy Intern for Heartland Alliance Nationwide, the poverty rate...

Read more