Academic journal article Journal of Financial Counseling and Planning

Preparedness for Financial Emergencies: Evidence from the Survey of Consumer Finances

Academic journal article Journal of Financial Counseling and Planning

Preparedness for Financial Emergencies: Evidence from the Survey of Consumer Finances

Article excerpt

The 1998 and 2001 Survey of Consumer Finances were used to compare the emergency fund adequacy of households. A low percentage of households met the 2-month, 3-month, and 6-month income guidelines for the quick, intermediate, and comprehensive measures in both years. More than 50% of households did not meet any of the guidelines. There was no difference in likelihood of meeting the guidelines in 1998 and 2001. Results of the logistic regression indicated that age, education, income, marital status, race, homeownership, retired status, self-employment, savings horizon, spending behavior, and risk behavior were significant determinants of the likelihood of meeting the guidelines.

Key Words: emergency funds, financial preparedness of households, savings, Survey of Consumer Finances


Lengthy periods of unemployment and income instability, coupled with the rising consumer and mortgage debt burden of American households over the past decade, suggested the need to revisit the topic of emergency fund adequacy. Data from the Federal Reserve Board's Survey of Consumer Finances (SCF) indicated growth in inflation-adjusted family income and net worth from 1998 to 2001. Although debt increased during this time period, housing equity and stock ownership grew at a rate that resulted in a lower debt burden for American families (Aizcorbe, Kennickell, & Moore, 2003). However, during the same period, bankruptcy filings increased by nearly 4% (American Bankruptcy Institute, 2005). Although families had resources such as unemployment insurance, credit cards, and home equity credit to cope with job loss or pay cuts, an adequate emergency fund could have helped alleviate the stress of financial setbacks and avoid foreclosure or bankruptcy. The lower debt burden of American families evident from the SCF in 2001 implies that more American families have the resources to maintain adequate emergency reserves.

The purpose of this research was to compare emergency fund adequacy of households in 1998 and 2001 using the SCF to determine whether the percentage of American households who meet prescriptive guidelines had changed. Have rising consumer and mortgage debt levels and the dramatic economic reversal accompanying the stock market bust of the early 2000s affected emergency fund holdings? This study is timely because data were collected at the height of the stock market and economic boom of the 1990s, and again, 3 years later, after the stock market bubble burst, and the economy entered recession with considerable loss of jobs.

Review of Literature

Measures and Guidelines for Adequacy of Emergency Funds

Johnson and Widdows (1985) conceptualized emergency funds in three graduated stages of liquidity: quick funds that consisted of very liquid assets including checking, savings accounts, and money market funds; intermediate resources that included quick funds plus certificates of deposit; and comprehensive funds that included intermediate resources plus stocks, bonds, and mutual funds. These measures were widely used in previous research. The advantage of conceptualizing emergency funds in this phased continuum is being able to balance the need for liquidity against the desire to maintain real purchasing power, particularly during periods like the early 2000s when interest rates hit 40-year lows. Because inflation and taxes reduce the purchasing power of savings, it may not be prudent to maintain 3 months of income or expenses in quick form. Although authors of many mass media articles (i.e., Answers to your money questions, 2003) recommended that emergency funds be held in liquid accounts (quick), a more prudent approach is to hold the funds in a variety of accounts ranging from liquid (low return) to less liquid accounts that pay positive real rates of return (intermediate). Clements (2001) advocated the comprehensive approach to keep up with inflation and taxes because it could be years before the funds are needed. …

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