Why Do Households Lack Emergency Savings? The Role of Financial Capability

Many U.S. households have insufficient savings to cope with income losses, expenditure shocks, and other financial emergencies, yet little research evidence explains why. Guided by Sherraden (2013) model of financial capability, we expand on prior research that examines the role of financial knowledge by incorporating additional factors and testing income interactions to explain a greater proportion of variance concerning whether or not households have money set aside for emergencies. We analyzed data from the 2009, 2012, 2015, and 2018 National Financial Capability Surveys and found that subjective financial knowledge, financial confidence, and savings account ownership, but not objective financial knowledge, were significant and consistent predictors of having an emergency fund. Savings account ownership was the strongest predictor, accounting for an increase in the probability of having an emergency fund of 25% to 29% across study years. Adding homeownership and ability to cover expenses to the models increased the proportion of variance explained by an average of 29%. Strategies to promote emergency savings should be multifaceted and include help from financial educators and counselors to create greater financial slack as well as programs and policies to increase access to short-term savings opportunities and incentives.