More than half of Americans have admitted to taking on debt rather than making use of their emergency fund savings when confronting financial pressures created by the coronavirus pandemic.
The surprise finding has been revealed in a new MagnifyMoney survey, which discovered that 54% of US consumers who have a rainy day fund decided to leave it untouched when encountering money troubles this year, and chose to use personal loans online, credit cards, and perhaps even payday loans instead.
Over two in ten (22%) people said they took on between $1,000 and $1,999 of debt instead of using their emergency fund savings, while 15% borrowed $5,000 or more rather than dip into the savings they had purposefully built up to use in such predicaments.
Should you use emergency funds or debt?
With the pandemic continuing to challenge the US economy, and a stimulus check 2 only just being passed by Congress, many more Americans will undoubtedly face a similar dilemma in the coming weeks.
When respondents were asked why they had decided to look to debt rather than fall back on their emergency funds, just over a quarter - 28% - said they didn’t want to use the money as it had taken them a long time to build up the savings, while 21% left it untouched in case an even worse emergency presented itself. However, by far the most popular reason, given by 44% of those questioned, was that they knew they’d be able to pay off what they borrowed quickly.
Given the whole idea of an emergency fund is to be a financial safety net should people fall into financial difficulties, this seems to fly in the face of logic. If you think you’ll be able to pay back what you borrow quickly, why not simply take the funds from your emergency fund and then pay that back quickly? That way you won’t be paying interest unnecessarily, and will also avoid the risk that you’ll need to call on the services of debt consolidation companies in the future.
“The whole point in having a rainy day fund is to be able to spend that money without having to go into debt,” says Ken Tumin, founder of DepositAccounts, of the research. “Keep in mind, an emergency fund is separate from any retirement savings you have. If you have funds set aside for an emergency or unexpected hardship, it is always better to use those funds than go into debt.”
How big should an emergency fund be?
A further 6% of those questioned said they turned to debt rather than their emergency fund because they didn’t have much money in their fund in the first place. This, of course, begs the question as to how big an emergency fund needs to be.
Tumin says that a good amount to aim for is somewhere between three to six months’ of a person’s net income or take-home pay, but suggests that some people should look to put away more than others.
“Those that are the sole provider for their family, freelancers or have home or artisan businesses should strive to have a year’s income in their emergency fund,” he adds.
As to where to keep these funds, people are urged to look to the best online banks for an easily accessible FDIC-insured savings account that doesn’t have withdrawal fees. That way, the money will be there waiting to be used when it is needed.