Want to sleep better? Save $500

Want to sleep better? Save $500
Liz Pulliam Weston
MSN Money
03/12/09

The typical personal-finance advice -- that you need emergency savings equal to at least three months' worth of expenses -- causes many to give up in despair. Accumulating such a fund can take months, if not years, and is particularly challenging in these times, when so many are struggling to pay their basic household bills.

The good news is that you may not need that much, at least not at first. Even a relatively small amount in your savings account can have an outsized impact on your well-being.

That's the conclusion of Stephen Brobeck, the executive director of the Consumer Federation of America, who examined savings studies conducted between 2004 and 2008.

For his study (.pdf file), Brobeck focused particularly on the savings habits of households that earn less than $50,000 a year (that's about half of all U.S. households). He found dramatic differences between people who had less than $500 saved and those who had more.

Those with less than $500 saved were far more likely to have a negative financial experience, such as:

• Struggling to pay monthly bills.

• Bouncing checks.

• Carrying credit card balances.

• Borrowing using high-cost loans, such as payday advances, car title loans or pawnshop loans.

For example: Among households with incomes under $25,000, 70% of people who had less than $500 saved were concerned about paying bills, compared with 36% of those who had more than $500. The figures were 51% and 36%, respectively, for those earning $25,000 to $50,000. Half of the low savers had overdrawn their bank accounts in the past year, compared with one in five of those with $500 or more saved.

Less sleep, worse health

Just as striking though, were the psychological impacts of having at least $500 in the bank.

Those who had less than $500 were more than twice as likely to worry frequently about money -- and much more likely to report they'd lost sleep, suffered health problems or been less productive at work.

Source: Opinion Research survey for Consumer Federation of America, October 2008

You wouldn't think 500 bucks would make much of a difference. Indeed, survey respondents thought they needed more. Those earning less than $25,000 said they needed $1,500 in emergency savings, while those earning $25,000 to $50,000 said they needed $3,000.

But Brobeck's study quantifies what I told you a couple years ago in "Why you need $500 in the bank": Building even a small cushion can help you start to get a real handle on your financial life.

So what's holding you back? Many people complain they don't have enough income to save.

• 64% of those with incomes under $25,000.

• 38% of those with incomes between $25,000 and $50,000.

• 17% of those with incomes over $50,000.

• 5% of those with incomes over $100,000.

And yet when Brobeck looked more closely at the lowest two income groups, he found something interesting: There was little difference in the incomes of those who had at least $500 saved versus those who hadn't.

• For low-income households, the median income of those who had $500 saved was $18,000, compared with $17,000 for those who had less.

• For moderate-income households, the median income of those with at least $500 in the bank was $38,000, compared with $37,000 for those who had less.

So something other than income also helps determine how much people save.

Brobeck examined other factors that might influence savings, such as gender, education, marital status, employment, age and whether the household had children.

There were some differences. High savers were more likely to be:

• Men.

• Four or five years older than low savers.

• More educated. Education made a big difference among the low-income folks; the gap was less pronounced among the moderate income group.

• Unmarried, for moderate-income respondents. Marital status made little difference for low-income respondents.

• Without children. Children had a bigger impact on savings in the moderate income group. For low-income respondents, high savers were somewhat less likely than low savers to have kids under 18. But moderate-income high savers were much less likely than low savers to have children.

Employment status didn't explain any differences in emergency savings for either group, Brobeck found.

So what really distinguished those who had saved at least $500 from those who hadn't? Basic savings habits: a budget, savings goals and an automatic savings plan.

The clear message here? If you want to save, make a plan, then make that plan automatic. Once you have $500 in the bank, you're on your way to a financial life that actually works.