Coming Up with Cash in a Pinch: Emergency Savings and Its Alternatives

n8l16iMIt is widely recognized that a significant proportion of U.S. households would benefit from spending less and saving more.  This brief by Stephanie Chase, Leah Gjertson, and J. Michael Collins summarizes a paper that reviews 80 articles about savings and households’’ ability to access cash quickly to meet unexpected expenses.

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The costs of some alternative credit products appear to be high on an absolute level. However, households’’ continued demand for these products indicates a strong underlying need for liquidity among many U.S. households. All people face some probability of experiencing an income shortfall in the future, yet preparedness for such events is uneven across demographic subgroups.  Behavioral economics and psychology suggest that households may fail to save for a rainy day due to forecasting errors. Thus, even families that have sufficient resources to start saving may fail to do so at adequate levels. Households may underestimate the probability of future expenses, or even procrastinate and defer the act of saving indefinitely into the future. Given these behavioral tendencies and the challenging economic environment, the demand for liquidity to meet short term emergency needs will continue to be a pressing need among a large proportion of consumers.