That’s not a lot of money. At least that’s what I thought before I ran across the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2014”.
If you’re a personal finance nerd like me, you’ll find many interesting and often surprising tidbits in the report. For example, 31% of respondents to the Fed survey said they went without some kind of medical care in the prior year because they couldn’t afford it.
$400 Emergency—How Would Americans Pay?
But the responses to one Fed survey question in particular jumped out at me. This graphic says it all:
Nearly half—47%—of respondents said they don’t have the cash to cover a $400 emergency expense. Among households with income less than $40,000, 69% could not pay cash for a $400 emergency.
If hit with a $400 emergency expense, 10% would sell something. 33% would borrow on a credit card, from a family member, or even from a payday lender (2%). 14% said they simply could not pay, I suppose instead absorbing whatever hardship comes from not dealing with the emergency event.
No Emergency Fund = Big Vulnerability
Not everyone can save up a modest emergency fund, or even $400. I get that.
But 47% of Americans? My gut tells me a big chunk of this group could set aside at least a few thousand dollars for an emergency, but find irresistible the urge to spend instead of save. And they’ve never bothered to establish some sort of discipline—like a small payroll deduction channeled to a savings account—that would help assure savings despite their spending urges.
But no emergency fund means big vulnerability, as the Fed’s numbers show. 35% of respondents would borrow to pay for an emergency, many on a credit card and some from a payday lender—maybe the worst choice someone desperate for cash can make!
Then the debt-fueled death spiral begins. High interest charges make the household budget even tighter and saving even tougher. A big enough emergency or a few small ones in a row might put an individual with no emergency fund in permanent hock, able to make only minimum required payments.
Now the unlucky consumer is right where high-interest lenders want them to be: snared in the debt trap, paying interest and fees to the lender with little chance of escape.
Don’t get trapped and then be forced to watch helplessly as lenders suck the financial life out of you.
Build an emergency fund. Click here to get started!