A majority of Americans say they can't afford a $1,000 emergency expense, a recent report from Bankrate finds.
Only 44% of Americans surveyed said they could use their savings to pay for an unexpected expense, instead opting to put it on a credit card or borrow cash from family or friends.
"The reality is that we are, unfortunately, essentially living in a paycheck-to-paycheck nation," Bankrate senior economic analyst Mark Hamrick tells CNBC Make It. "We're a consumer-based society where people are implored on a constant basis to spend their money, and the messaging is not nearly as strong with respect to saving your money."
Unexpected economic events that occurred in quick succession over the past five years, from the fallout over the pandemic to high inflation, have shocked the personal finances of many Americans, says Hamrick.
"It's quite remarkable in the current environment that even with low unemployment and a job market that has been both robust and resilient in recent years, that we still have this remarkably low percentage of Americans who could pay this emergency expense," he adds.
No matter how much you have saved up, economic conditions make now an ideal time to focus on building up your emergency savings, Hamrick says.
Why now is a good time to save
Nearly a decade of low interest rates followed by a period of high inflation and the Federal Reserve's interest rate hikes have created an environment that is beneficial for those shopping around for high-yield savings products.
Americans can currently find anywhere from 4% to 5% annual percentage yield (APY) on a number of different savings products, from high-yield savings accounts to certificates of deposit, Hamrick says. That's much higher than the national average yield for savings accounts, which stands at 0.57% APY as of March 18. It's also a big jump from the 0.5% APYs that high-yield savings accounts carried in 2021.
"For those wisely focused on managing and building their emergency savings, this is an opportune time to benefit from the increase in interest rates," Hamrick says. "Emergency savings, by definition, need to be liquid or easily accessible. A high-yield savings account dedicated to this purpose amounts to a self-insurance policy guarding against unplanned expenses."
Why prioritizing emergency savings matters
Despite high interest rates on credit card debt, 21% of Americans told Bankrate that they would choose to finance a $1,000 emergency expense with a credit card and pay it off over time.
"There is a steep price to be paid, quite literally, for failing to have emergency savings," says Hamrick. "And there can be a real domino effect that's quite negative on personal finances if one doesn't have sufficient emergency savings."
Depending on credit cards could delay your financial goals of paying off debt or saving for retirement, as the high interest rates that credit cards now carry can make that debt difficult to settle.
But by building up emergency savings and using it to cover unexpected expenses, "you're solving your own problem," Hamrick says.
"This is a way of self-insuring against the inevitable, including potential interruptions in income or employment," he adds.
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