Perspectives : DC Retirement | May 19, 2025

The impact of emergency savings on financial well-being

According to a study by the Federal Reserve, 36% of Americans would struggle to cover an unexpected $400 expense.¹ Having just $2,000 in savings can provide a critical buffer, reducing the likelihood of financial distress and enhancing overall well-being. This simple step can transform how households manage their finances and reduce the stress that comes with unexpected expenses.

The potent relationship between emergency savings and financial well-being

Vanguard researchers surveyed more than 12,400 Vanguard investors in July 2024 to understand the impact of emergency savings on financial well-being. The study, the results of which are summarized in The Relationship Between Emergency Savings, Financial Well-Being, and Financial Stress (2025), found that emergency savings are the strongest predictor of financial well-being. The impact of having at least $2,000 in emergency savings is remarkable: Those who have set this amount aside report a 21% increase in financial well-being, and having at least three to six months of expenses saved is linked to an additional 13% increase in financial well-being, even after accounting for income, debt type, and financial assets (see Figure 1).

“People with emergency savings have a higher level of financial well-being, spend less time thinking about and dealing with their finances, and are less distracted at work,” said Vanguard Senior Behavioral Economist Paulo Costa, who conducted the research with colleagues Malena de la Fuente and Marsella Martino.

Figure 1. Emergency savings are associated with a substantially higher level of financial well-being

Notes: The model above shows a regression framework demonstrating the relationship between the Consumer Financial Protection Bureau Financial Well-Being Scale score and indicator variables for two kinds of emergency savings (at least $2,000 and at least three to six months of expenses), collateralized and noncollateralized debt, household income, and amount of financial assets. The framework used also includes gender, level of education, and family structure. All coefficients are significant at the 1% level. The sample size is 12,443. The baseline group is composed of clients without either $2,000 in emergency savings or three to six months of expenses saved, no debt, income less than $50,000, and assets totaling less than $50,000. The average financial well-being score for the baseline group is 42.3.

Source: Vanguard.

The cost of not having emergency savings

Investors without emergency savings spend significantly more time on financial matters and report higher levels of financial stress. On average, they spend 7.3 hours per week thinking about and dealing with their finances, compared with just 3.7 hours for those with at least $2,000 in emergency savings (see Figure 2). Additionally, 51% of investors with no emergency savings reported an increase in financial stress year over year, compared with only 15% of those with at least $2,000 in savings.

Figure 2. Investors without emergency savings spend more time thinking about and dealing with their finances

Notes: The question used to measure time spent thinking about and dealing with household finances was, “In a typical week, how many hours do you spend thinking about and dealing with issues related to your household’s finances?” As in The Economics of Financial Stress (Sergeyev, Lian, and Gorodnichenko, 2024), the answers were capped at 20 hours per week to reduce measurement error.

Source: Vanguard.

The financial stress associated with not having emergency savings can also spill over into the workplace and impact productivity. Workers without emergency savings are four times more likely to be distracted at work due to financial stress.

“Emergency savings buy peace of mind and provide a buffer in case anything goes wrong,” de la Fuente said. “This is especially important because many families experience some sort of financial emergency about once a year. Having that buffer available lets them prepare for the unexpected and avoid the worry and financial stress that can come from not having this buffer.”

Implications for plan sponsors, policymakers, advisors, and investors

The findings of this study have important implications for various stakeholders in the financial industry.

Plan sponsors: Plan sponsors have a unique opportunity to offer emergency savings as a core employee benefit. Clients without emergency savings reported spending over six working hours per week distracted by financial stress. Offering emergency savings as a benefit could foster a more engaged and less stressed workforce with increased productivity and decreased absenteeism.

Policymakers: Facilitating a higher amount of emergency savings as part of an employer’s retirement or benefit plan could be beneficial. The SECURE 2.0 Act has set a limit for a single penalty-free withdrawal from a retirement savings account of $1,000, but policymakers may want to consider ways to increase this limit to better align with the financial needs of workers.

Advisors and investors: For investors and their advisors, the importance of emergency savings cannot be overstated. Advisors can play a crucial role in educating clients about the strategic value of emergency savings and help them develop a plan to build and maintain these funds.

Having even a small amount of emergency savings can significantly improve financial health and reduce stress. For plan sponsors, policymakers, advisors, and investors, the message is clear: Prioritizing emergency savings is a powerful step toward achieving financial well-being.

"The data clearly show that emergency savings are a cornerstone of financial well-being. By prioritizing these savings, individuals can significantly reduce financial stress and improve their overall financial health," Martino said.

Source:
¹Neil Bhutta, Jesse Bricker, Andrew C. Chang, et al. Changes in U.S. Family Finances from 2016 to 2019: Evidence From the Survey of Consumer Finances. Federal Reserve Bulletin, 2020. 106(5): 1–42.

Notes:
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