Want to sleep better? Save $500

By Liz Pulliam Weston

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.

• Talk back: How did you save money today?

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.

Psychological impact of emergency funds 

	Saved less than $500	Saved more than $500
Worried about personal finances in past year	85%	69%
Worried a lot	53%	21%
Reported by worriers:
Loss of sleep	64%	42%
Decline in health	54%	29%
Loss of productivity at work	42%	23%

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.

What determines whether you save?

It's a fact that income makes a big difference in who saves and who doesn't. The less money you make, the more likely you are to have inadequate savings. The percentage in each income group reporting less than $500 saved was:

• 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.

Continued: Something other than income at work

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