WASHINGTON (1/25/16)--A new brief from Pew Charitable Trusts, the third in a series, explores the role of emergency savings in family financial security--providing insight for credit unions that seek to improve the financial lives of members.

In the year before the Pew survey, 60% of participating families experienced a financial shock. For most of these households, the most expensive shocks were destabilizing and made it hard to make ends meet. Even among households that do not have a single big, disruptive shock, smaller expenses can strain budgets and create hardship. Seventy-one percent of respondents said that unexpected expenses made it hard for them to save in some months.

Families have little savings to fall back on in the event of an emergency. Perceptions of financial security often differ depending on whether it is early or later in the month.

Many households use their savings accounts as transaction accounts, similar to checking. Similarly, recommended financial practices such as making a budget are not associated with increased levels of financial security.

The report recommends policymakers should consider four key implications as they seek to tackle American families’ short-term savings needs:

• Households benefit from automatic mechanisms to generate savings. Households need to be able to access their funds to cope with emergencies quickly and avoid long-term negative consequences. They must be able to balance immediate consumption needs, build and maintain emergency reserves, and amass adequate savings to support them over the long term. Households struggle with these trade-offs day to day and might benefit from tools and policies that help them manage these sometimes conflicting efforts.

• Access to savings in times of need may reduce hardship and maximize financial control. Savings programs that prevent families from accessing their funds risk making things worse when households confront short-term challenges. Knowing they can use their savings in times of need may improve people’s perceptions of financial well-being and increase their willingness to use new savings products.

• Families need targeted help understanding the ebbs and flows of their income and expenses. More than half of survey respondents said their income or their expenses vary from month to month. This lack of predictability makes saving difficult. Introducing more automation to short-term savings and fostering products that help families better predict and understand the nature of their balance sheets--and save more when they can afford to--would be helpful.

• Policies and programs that focus on specific accounts may not align with families’ needs and goals. Among the third of households saying they had no money set aside as savings, half actually had money in a savings account. Households engage in complex mental accounting in which they set aside money for certain expenses or goals, regardless of the account in which that money is housed. So although specific goals can help motivate savers, programs should include mechanisms to ensure that households generate new savings rather than simply shuffling around existing resources.