Even though the economy is slowly recovering, more than 25% of Americans have absolutely no emergency savings whatsoever. While it’s better to have some emergency funds rather than none, unfortunately many people who do manage to put some money in a regular savings account for emergencies get lousy interest rates. Even worse, many are forced to pay excessive fees because they don’t use the account as often as necessary or sometimes use the account much.
Typically, an emergency fund consists of enough money to cover a full six months’ worth of expenses. Sadly, less than 25% have six months in their account and nearly 50% have three months or less. These aren’t random statistics by the way, they are from a Princeton Survey Research Associates International survey of just over 1000 adults.
The Consumer Federation of America did another survey that found that most statement or passbook savings accounts have extremely low interest rates and routinely tack on extra fees. The reason this is problematic is that nearly 60% of all consumers use a statement or passbook account to put their emergency money, the money that they want to have a side to pay for unexpected expenses like small medical emergencies, car repairs and so forth.
For the latter survey, information from the Federal Reserve Board’s 2010 Survey of Consumer Finances was used for their analysis, including research done on 150 banks using their websites. This included the 50 largest banks based on the number of branches that they have and also the nation’s 10 biggest credit unions.
In their report it was stated that approximately 17% of banks were paying .01% interest (and sometimes less). On a $1000 balance this amounts to a ridiculous $.10 interest in one year. Sadly, only 4% of the banks surveyed paid more than 0.25% on what would be considered a basic savings account.
When you’re talking about ridiculously low interest rates like this, even a $10 fee can wipe out a years’ worth of interest in one shot. For example, using a two dozen bank sample it was found that there is a fee of approximately $12 when a savings account is left inactive for six months or more. Generally, banks don’t charge these fees unless a balance drops below their minimum, which is traditionally about $50 but, no matter the balance, after six months of activities a $10 fee is usually charged.
While these fees may seem inconsequential, the fact is that they are quite burdensome for people who build an emergency account up to a specific level and then let the money sit there in their account, untouched, for that rainy day. In fact, anyone who has put emergency funds aside but, once they are there, doesn’t make any more deposits and doesn’t have an emergency arise, could get hit with some pretty hefty fees. (talk about irony.)
Then there are the banks that penalize their customers when they make excessive withdrawals. As far as the federal government is concerned, savings withdrawals are limited to six per month but, in many cases, (nearly half of the banks in the study from above) banks have limits on withdrawals that keeps them to 3 per month and charge a fee for more than that from $.50 to $15. Even though the reports found that savings numbers are a bit better than before the recession began, with only 39% of Americans having just 3 months’ worth of expenses in their savings account the numbers are still a bit troubling.
The cause appears to be stagnating wages and, even though many people have shed a lot of debt since the recession, most of them still don’t have an excess of cash. While it’s true that an emergency fund is not meant to be an investment, it’s also true that it should be in a place where it’s safe from fees that could wipe out any interest gained and actually reduce the amount saved over time.
The lesson from all this is simple; if you have a savings account that you use specifically for an emergency fund, make sure that, even if it’s ‘full’, you keep at least the minimum amount of money in it and that you use it a minimum of one time a month either for a small withdrawal or a small deposit. If you do this you’ll more than likely reduce bank fees 20 and, even if you’re not making big bucks, you won’t be losing any either.