The recent economic downturn has highlighted the financial fragility of many U.S. households. As a result, unemployment, the foreclosure crisis, high consumer debt, and retirement savings have garnered significant attention among researchers and policymakers. Yet, another key financial reality for many households is the inability to access liquid assets quickly in order to meet unexpected expenses. Households may prepare for such expenses by setting aside modest amounts of emergency (“rainy day”) savings. Adequate preparation for a financial emergency is especially important for low-income households, who have less access to traditional sources of credit and whose tighter budgets make saving more difficult. Households unable to meet unexpected expenses can experience serious hardships including utility disconnection, housing instability, inadequate medical care, and loss of transportation.

This study examines the following  two questions: (1) How do low-income households plan to cope with financial emergencies? (2) Are low-income households with emergency savings less likely to experience  economic hardship (e.g. lack of money for food or basic needs, telephone disconnection, utility shut-off, repossession)? The study uses data from the Making Connections project, a longitudinal survey of households in disadvantaged neighborhoods in seven U.S. cities. Data collection took place in 3 waves between 2002 and 2011. A final sample of 2,381 households who were in all waves is used for the analysis. This unique dataset includes information on income, assets, debts and economic hardships, as well as rich data on neighborhood characteristics including local amenities such as financial institutions. An instrumental variable approach is used as a robustness check for unobserved variables that may be related to both the ability to acquire emergency savings and experiences of economic hardship. Distance to a financial institution is the instrument used to predict emergency savings. Further research is needed to examine the relationship between emergency savings and access to other forms of liquidity when faced with a financial emergency.  In addition, research is needed on interventions that support the development of emergency savings among low-income households.