Nearly half of Americans have savings accounts with less than $500.

According to a GOBankingRates survey of 1,063 U.S. adults conducted in November 2023, nearly half of Americans have $500 or less in their savings accounts, leaving them vulnerable to unexpected expenses.

Between $501 and $5,000 is the range of savings for 29% of respondents, while 21% of Americans have more than $5,001.

A majority of surveyed individuals have $500 or less in their checking accounts, with only a small percentage having $2,001 or more.

Many Americans are living paycheck to paycheck due to the lack of cash in their savings or checking accounts, leaving them vulnerable to unexpected expenses. Building an emergency fund is crucial if they can manage to do so.

Why an emergency fund is important

Many Americans lack an emergency fund, which is often advised by financial planners to have on hand to cover unforeseen expenses.

During times of high inflation, Americans may struggle to make ends meet due to various reasons, including being affluent professionals who don't save money.

According to Alex Lozano, a certified financial planner and founder of Lozano Group Wealth Management, the inability of Americans to withstand an emergency costing $500 or even $1,000 can have a financially detrimental effect on their life, potentially leading to a domino effect.

He states that people frequently use high-interest credit cards to cover unforeseen expenses.

An emergency fund can help you avoid the cycle of debt accumulation, interest charges, and the difficulty of escaping it, as advised by Christopher Lazzaro, chartered financial consultant and founder of Plan For It Financial.

Lazzaro advises building an emergency fund of three to six months of expenses, but acknowledges that everyone's circumstances are unique. Those with a single or non-working spouse may need to save for 12 months worth of expenses.

Finding space in your budget for monthly emergency savings contributions can be challenging.

Lozano advises that before investing for the future, individuals should first establish an emergency fund.

Regularly saving $20 per month is a good starting point to develop the habit of making contributions, which can be increased later when you have more income.

Stash your emergency fund in a high-yield savings account

Stashing your monthly income in a high-yield savings account can be a smart move to build an emergency fund. With annual percentage yields close to 4.5%, high-yield savings accounts offer a higher return compared to the average of 0.6% for all savings accounts, according to Bankrate.

According to GOBankingRates, only 9.8% of survey respondents have a high-yield savings account.

Although the bank offers better rates, many individuals remain hesitant to switch due to inertia, as they have been with their current bank for an extended period.

A high-yield account with a 4.5% interest rate could result in $22.50 in interest after one year, compared to $3 in a traditional savings account for a $500 balance.

If you start with a small emergency fund, it may not seem like much at first, but it will grow over time, especially if you add to it to cover several months of expenses.

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