To build financial resilience, we need to promote savings

In a given year, more than half of US households will experience an event that creates a significant expense above and beyond their normal household budget. These events, whether an illness, accident or damage to their property, can create significant hardship for people who lack resilience, that is, the ability to cope with a financial emergency such as a sudden loss of income or an unexpected expense. Resilience is one aspect of financial inclusion, in addition to financial access and financial product use, that creates benefits.

And many people aren’t financially resilient. The newest edition of the Global Findex Database asked adults around the world whether they could access extra money – $3,300 in the US and $320 in India (equal to 5% of the country’s gross national income) within 30 days, and, if so, how hard would it be. The results show that 55% of adults in developing economies could reliably access emergency money in that one-month timeline. That leaves 45% of adults without the financial means to deal with a financial shock. For these individuals and their families, cutting back on basic necessities may be the only way they can free resources to address an urgent financial need.

The share of financially resilient adults varies widely by geography and is connected to the sources of emergency money that people rely on. For advocates of financial wellbeing, understanding these Global Findex 2021 findings can help guide product development and policies to build financial resilience.

Here are some crucial learnings from the report:

Family and friends are the first-line sources of emergency money for 30% of adults in developing economies followed closely by work income, which 27% of adults would rely on. Yet there is a significant difference in how reliable these sources are. About half of the people who would turn to family and friends say the money would be very hard to get; while a third of people who would try to increase their work hours say it would be very difficult to get the money.

In contrast, savings are the source of choice for just 18% of adults in developing economies with less than a fifth of this group saying the money would be difficult to get from this source. These facts point to the benefits of savings accounts for improving financial resilience. It is not unrealistic for people with low incomes to save. Research finds that even very poor individuals can and do save small amounts that accumulate into relevant sums over time.

When we drill down a level to examine these trends within specific geographies, we see a good deal of variation by region in how people cope with expensive emergencies. In the Middle East and North Africa, for example, the reliance on family and friends in an emergency is above 50% – more than 20 percentage points over the developing economy average. Fortunately, personal, social networks are also slightly more reliable in MENA than elsewhere, with around 60% of the adults who rely on family saying the money would not be hard to get.

In contrast, a smaller share of about 35% of people in South Asia rely on family and friends for emergency money, yet about two-thirds of them say the money would be hard to get. An equal share of about 35% would try to seek additional work opportunities, but this is also unreliable for about two-thirds of this group. The consequence is that South Asia is the least financially resilient region in the world, with only 32% of adults saying they could access emergency money in 30 days without much difficulty.

In contrast, East Asia and the Pacific is the most resilient developing world region, with 77% of people saying they could access emergency money. Interestingly, their sources differ from less financially resilient regions. About 30% of adults would rely on savings and an equal share would rely on additional work for emergency money. Plus, the vast majority of adults relying on either source (over 90% of each) say they could get the money without difficulty.

It’s important to note that these averages are heavily skewed by China, where Global Findex 2021 data suggests that 89% of adults have a bank account and 45% save formally. About 20% of East Asians also turn to friends, but their social networks seem more reliable than elsewhere, as only about a quarter of this group says the money would be very hard to get.

The Global Findex data suggests that savings are the most reliable way to weather a financial emergency. For every cut of the population, whether by region, income group or gender, adults that rely on savings for emergency money are more confident in their ability to access it without much difficulty than members of their cohort relying on other sources.

The main message we take from this data is two-fold. Firstly, people need a safe and affordable place to save and formal savings accounts are the best option. Even better would be for those accounts to include design features that make it easy, frictionless and rewarding to save. These can even help people with very low incomes to begin amassing the savings they need to weather financial emergencies; save for investments, such as in a business or to pay for education; and have a greater sense of confidence and control over their financial life. During periods of high inflation, it may be necessary to offer deposit interest rates that are high enough to counteract losses in purchasing power as an incentive to save.

Secondly, women and members of low-income households should be singled out as a focus for savings-promoting policies, since they are more likely than men and members of higher-income households to rely on friends and family and to say that their social networks are unreliable.

The world has made impressive progress in the past 10 years in expanding financial inclusion through increased access to accounts and increased use of services like payments, savings and borrowing. It’s time to put equal attention on financial resilience to help low-income individuals weather unexpected events and remain financially stable for the future.