In these times of economic uncertainty, Americans are seeking security by building their emergency funds — well, a lot of them are, at least.
A new GOBankingRates study of more than 1,000 adults found that nearly half the country prioritizes building a healthy savings cushion above all else — but one age group has other ideas.
The youngest adults are pursuing one financial goal above all the others at the expense of saving for unforeseen costs. Here’s a look at their motives and expert insight into the potential consequences of their actions should things not pan out.
A Rainy Day Fund or a Roof To Keep Out the Rain?
More than two out of five people in all age groups — about 45% of the study’s respondents — are saving money to build a retirement fund. From there, there was a huge drop off to less than 20% who are saving for retirement. Another 13% are saving for a house while smaller, single-digit percentages are saving for a car, education, vacation, wedding or some other large purchase.
Ambitious Gen Z Nearly Rivals the Boomers in Early Adulthood Homeownership
Gen Z is the reason that buying a house rose to third place in the order of priorities.
A full 25% of 18-to-24-year-olds are saving for a down payment compared to only 22% who are building an emergency fund. No other group inverted those two priorities. Among the other demographics, at least twice as many people prioritized emergency savings over the pursuit of homeownership.
Gen Zers are gambling that an unexpected short-term crisis won’t hamper their long-term goal of owning a home — and in large part, it seems to be paying off.
According to data from Redfin, a greater percentage of Gen Zers own homes than both millennials and Gen X when they were the same age. In fact, they’re only slightly behind where the boomers were in their 20s, and that generation is famous for getting married and buying houses young.
Gen Z Is Making an Optimistic but Risky Bet on Smooth Sailing
Nearly one in three of the oldest Gen Zers — last year’s 25-year-olds — already owned a home in 2022. That’s an impressive run right out of the adulthood gate, but many are attempting to follow their lead by wagering that nothing will go wrong before they get their hands on their first set of house keys.
It’s a high-stakes wager.
“While homeownership is a wonderful goal, establishing an emergency fund should be your first priority when you’re starting out on your own,” said Brittany Pederson, director of deposits and payments for Georgia’s Own Credit Union, the second-largest credit union in Georgia. “Unplanned expenses will almost certainly pop up, whether that’s a surprise medical bill, car repair, travel needs, etc., and if you can avoid putting those expenses on a credit card, which will accrue interest, it will allow you to stay on track for your other long-term savings and budget goals.”
A Home With No Savings? Be Careful What You Wish For
Pederson makes the point that without an emergency fund, unplanned expenses could derail your pursuit of not just homeownership, but all your financial aspirations by forcing you to borrow your way out of the next disaster.
But the greater danger might lie in what happens if you actually accomplish your objective before an expensive crisis strikes.
The Gen Zers who reach their goal of homeownership after saving a down payment at the exclusion of everything else will find themselves holding six-figure loans with nothing in the bank. Should something go wrong, they risk losing their houses and their down payments if they can’t pay back the money they borrowed to make their financially precarious dreams come true.
“It’s crucial for Gen Zers to consider building an emergency fund before purchasing a house,” said chartered financial analyst Greg Wilson, a real estate investor who retired from his financial services career at 42 to found ChaChingQueen and Dad is FIRE. “An emergency fund serves as a financial buffer that can cover unexpected or large expenses, such as job loss or medical bills. Without this safety net, Gen Zers who prioritize buying a house may find themselves unable to meet mortgage payments if they encounter unforeseen financial emergencies.
“Furthermore, home ownership comes with its own set of potential unexpected costs, like major repairs. Without an emergency fund, these costs could lead to financial distress or even debt.”
So, You’re Saving for a House Without an Emergency Fund? Congratulations on Your Emergency Fund
The immediate and pressing nature of emergencies is precisely why emergency funds are such a crucial part of a healthy financial foundation. You simply can’t ignore a leaky roof, broken nose or dead furnace, no matter where you have to turn for cash. For most people with insufficient savings, that means taking on dangerous revolving debt in the face of a crisis or, even worse, something drastic like a payday loan.
“Lack of emergency savings could force young people to resort to credit cards or predatory loans in a crisis, harming long-term finances,” said Fluent in Finance founder Andrew Lokenauth, a 15-year Wall Street veteran who held leadership positions at JP Morgan, Goldman Sachs and Citi.
Some even tap their 401(k)s or IRAs to cope despite the nasty tax hit and early withdrawal penalties they know their actions will trigger. Why? Because in the face of a genuine emergency, any money will do — and the contents of a savings account dedicated to a hypothetical future down payment are no exception.
So if you have no emergency fund but are saving for a home — or a car or college or anything else — you’re actually building an emergency fund but just calling it something else.
You might as well just do it correctly and in the correct order.
How Much Is Enough?
The one in four Gen Zers who are working toward a down payment instead of amassing emergency savings should resist putting the cart before the horse.
“Renting may be a better option if no emergency fund has been built up yet,” said Lokenauth.
They should start by saving the same three to six months’ worth of income that financial experts recommend for just about everyone, but they won’t truly be ready to buy a house until they also save for the many house-specific expenses that follow the down payment.
“Homeownership costs like repairs can quickly deplete savings,” said Lokenauth.
The standard guidance is to save 1%-4% of your home’s value for annual maintenance — that’s $2,500 to $10,000 for a $250,000 home. Bob Vila suggests budgeting by your home’s age. If your house is less than 10 years old, 1% should probably do it, but scale up toward 4% for houses that are more than 30 years old.
If that sounds like a lot — especially on top of a standard emergency fund — that’s because it is. But so is the cost of repairing a roof or HVAC system when it fails, which it surely will, along with every other system in your home, if given enough time.
Gen Z’s efforts and priorities are admirable, but buying a house is just the start of the financial responsibility of homeownership. Once they sign with the mortgage lender, they won’t have a landlord to turn to when something goes wrong — and they’ll only be as ready as their emergency fund.
