While inflation and high interest rates are still taking a toll on consumers, more Americans are able to set aside money in an emergency fund, according to a recent report.
This year, 30% of adults said they have more emergency savings now compared to one year ago, the report by Bankrate found.
More than half of Americans also said they have more emergency savings than credit card debt, an improvement from previous years.
“The number of households reporting more savings than one year ago has been steadily increasing since we began measuring it in 2022, and for the first time exceeds those reporting less savings than the prior year,” said Greg McBride, chief financial analyst at Bankrate. “This is evidence that as the pace of inflation has slowed, it has enabled more Americans to make progress in building, or rebuilding, their emergency savings.”
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Soaring inflation in the wake of the pandemic made it harder to make ends meet. At the same time, the Federal Reserve’s most aggressive interest rate-hiking cycle in four decades made it costlier to borrow.
Although inflation has eased significantly, it’s still above the Federal Reserve’s 2% goal.
“Just like consumers, the Federal Reserve wants to see further cooling of inflation,” said Mark Hamrick, Bankrate’s senior economic analyst.
Fed officials are watching closely as they contemplate their next monetary policy moves. The central bank cut its benchmark rate by a full percentage point in the second half of 2024, but policymakers have been advocating a more cautious pace ahead as they evaluate the overall strength of the labor market and President Donald Trump’s policy ramifications.
In remarks before the Senate Banking Committee last week, Federal Reserve Chair Jerome Powell said the Fed doesn’t need to move quickly to ease monetary policy.
“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” he said.
Shortly after taking office, Trump said he would “demand” that interest rates come down “immediately.” However, in subsequent remarks, Trump said he agreed with the decision to keep rates in place.
Why an emergency fund is critical
Having an emergency savings account is key for weathering any sort of financial shock. Research shows that having as little as a few hundred dollars set aside greatly reduces the risk that a family will miss a rent or mortgage payment or be forced to skip medical care.
In addition to helping avoid financial hardship in the short term, emergency savings can also protect long-term financial security.
According to research by the AARP Public Policy Institute, 53% of U.S. households do not have an emergency savings account, including half of people over age 50, which makes it more likely they will tap their retirement accounts in a crisis.
How to build an emergency savings account
For now, savers can make the most of higher rates by setting some money aside in a high-yield savings account.
“While the Fed putting the brakes on interest rate cuts stinks for those with debt, it is welcome news for savers,” said Matt Schulz, chief credit analyst at LendingTree.
In recent years, top-yielding online savings accounts have offered the best returns in more than a decade and still pay nearly 5% — up from around 1% in 2022, according to Bankrate.
“Returns on high-yield savings accounts have fallen from their record levels as the Fed has moved to lower rates. However, as the Fed pauses, that decline should slow as well,” Schulz said. “Your best move is to keep building that emergency fund.”
Most financial experts recommend having at least three to six months’ worth of expenses set aside, or more if you are the sole breadwinner in your family or in business for yourself.
“While we don’t have any idea what the economy will look like in three months, six months or a year or more, we absolutely know that building a stable financial foundation today will help you better weather whatever storm might be ahead,” Schulz said.