Emergency Saving and Household Outcomes

Purpose: Emergency savings or 'rainy day' savings act as form of insurance against unexpected immediate expenses or a sudden income drop. Over time it is likely that most households will face a financial emergency that requires timely access to liquid assets and households with low income are at an increased risk of experiencing such emergencies.  Adequate preparation for an economic shock is especially important for low-income households, who have less access to traditional credit and whose tighter budgets make saving more difficult.  The inability to adequately smooth consumption may threaten financial stability and increase risk of material hardships that influence family wellbeing.  

Methods: This study uses a longitudinal sample to examine whether low-income households that report saving for emergencies are less likely to experience subsequent material hardships.  The study uses three waves of data from the Annie E. Casey Foundation's Making Connections Survey of households in disadvantaged neighborhoods conducted 2002 to 2011.  Final samples of 2,570 and 1,055 households are used for the analysis.  Material hardships indicators are: not filling medication prescription, skipped housing or utility bill payment, utility disconnection, phone disconnection, food insecurity, repossession, and an indicator of multiple hardships.  Logistic regression is used to predict the likelihood of each hardship for emergency savers compared to non-savers controlling for socioeconomic and demographic characteristics as well as other saving behaviors.  Individual level fixed-effect analysis of those changing emergency saving status are conducted as a robustness check.

Results: Multivariate results suggest that households saving for an emergency are less likely to skip a housing or utility bill [odds ratio .556, p <.001], have a phone disconnection [.619, p <.05], and experience three or more hardships [.514, p <.01].  Results are likely influenced by selection into saving for an emergency and may be biased by unobserved variables.

Conclusions and Implications: Results suggest that saving for an emergency may protect households from future material hardships but additional research is needed to tease out mechanisms contributing to the likelihood of emergency saving.  Policies and programs that support the development of emergency savings could contribute to the wellbeing of low-income households.  Innovative programs and products have been developed to facilitate accessible savings in low-income households such as savings products for unbanked households, leveraging tax time as an opportunity to save, and increasing access to safe and affordable bank accounts.  Efforts should be made to bring effective savings mechanisms to scale.