The Emergency Savings Crisis Shows Why We Need Financial Literacy
A record number of workers are now unemployed as a result of the coronavirus pandemic. As of the beginning of April, over 6.6 million unemployment benefits claims had been filed. Though $1,200 stimulus checks from the federal government are on the way for many individuals, worries about financial insecurity are mounting.
The sudden financial hardships facing many Americans have brought another hidden crisis into sharp focus: nearly half of adults don’t have enough emergency savings to cover an unexpected $400 expense. Additionally, 1/4 of adults don’t have any retirement savings, at all. For anyone who has seen James Cameron’s movie, The Titanic, they’ll know that a shortage of lifeboats and life jackets becomes obvious when the boat has capsized.
Times like these are a clarion call for financial institutions, especially banks and credit unions that serve working-class Americans, to help their consumers to make better financial decisions. Overwhelming evidence shows that financial insecurity stems from a lack of financial literacy that starts early in life. Many Americans simply lack the information needed to make financially responsible decisions and to plan effectively for the future.
This is a solvable problem. In the wake of the 2008-2009 Great Recession, new resources proliferated to help consumers make key decisions like creating budgets, establishing retirement plans, and automating personal finance behaviors like moving money into savings. The Start Small, Save Up initiative by the Consumer Financial Protection Bureau (CFBP), for example, is a consumer-friendly tool to provide guidance and advice.
If the coronavirus pandemic isn’t enough reason for banks & credit unions to focus on helping consumers build emergency savings, the fact that April is also Financial Literacy Month should be enough to tip the scales. Amid a national crisis, many financial institutions are joining initiatives such as the first-ever National Financial Bee to help educate students socially distancing at home this month about key topics such as healthy financial habits, creating a budget, emergency savings, college savings, and retirement savings.
The damage done by lacking emergency savings isn’t just to one’s wallet, either. Many financial institution employees who work directly in customer service have witnessed first-hand in the last few weeks how financial hardships are closely related to mental wellness. Stress and anxiety have mounted as a result of financial insecurity, further highlighting the importance of relationship-based banking to retain and serve stressed and anxious consumers.
Though many financial institutions are still in full crisis-mode just like many consumers, others are starting to realize that now is the time to innovate creatively to offer more relevant, timely, and helpful products & services to their consumers. Sharing helpful resources like blog and video content is a good first step, but there are several different ways that financial institutions can take their consumer interactions to the next level.
First, financial institutions can offer highly personalized, interactive resources to directly address consumer needs. Stressed and anxious consumers don’t want to sift through libraries full of mostly irrelevant information to find what they need, and many of them don’t even know where to start. Many of them are too busy to connect with a financial service employee and need resources they can access at their convenience. So, financial institutions can take the lead by curating personalized resources using data-driven insights.
Second, financial institutions can also incentivize learning through fun contests and prizes. The National Financial Bee, for example, awards up to $10,000 in scholarships to the 7-10th grade students who win the essay contest. Other financial institutions have tied the completion of financial education sequences to rate reductions or being entered into raffles. Making personal finance education more exciting not only helps consumers to learn more information, but it also helps financial institutions to drive brand loyalty through positive recognition.
We all hope that the coronavirus pandemic will come to a swift and speedy end and that we can get back to normal soon. It’s important to remember, though, that the data about Americans’ widespread lack of emergency savings came from before the coronavirus hit. The emergency savings crisis has been lurking. Plus, accidents and unplanned expenses happen all the time — medical bills, car repairs, home damage — life happens whether we plan for it or not, and many Americans will continue to face emergency financial situations after the pandemic is over.
The time is always right to help consumers improve their financial literacy to build up emergency savings, but it’s especially important right now.