For much of the country’s population, the American dream is a far cry from the paycheck to paycheck nightmare of their American reality. Just under half of Americans would be forced to take drastic measures such as selling off belongings, borrowing money from family and friends or taking on high-interest payday loans if confronted with a financial emergency requiring a mere $400.
That’s according to the Federal Reserve’s recently released “Report on the Economic Well-Being of U.S. Households in 2014.” The report, produced by the Fed’s Division of Consumer and Community Affairs, is intended to “capture a snapshot of the financial and economic well-being of U.S. households, as well as to monitor their recovery from the recent recession and identify any risks to their financial stability.”
As a whole, the report isn’t all bad news. In fact, it even offers evidence of a positive trend in the economic situations of U.S. investors, homeowners and renters nearly a decade after the housing bust that rocked the economy for years.
But buried deep within the report, which was compiled based on the survey answers of 50,000 Americans from all backgrounds, is this caveat:
To determine individuals’ preparedness for a smaller-scale financial disruption, respondents are also asked how they would pay for a hypothetical emergency expense that would cost $400. Just over half (53 per-cent) report that they could fairly easily handle such an expense, paying for it entirely using cash, money currently in their checking/savings account, or on a credit card that they would pay in full at their next statement (referred to here as “cash or its functional equivalent”). The remaining 47 percent indicate that such an expense would be more challenging to handle. Specifically, respondents indicate that they simply could not cover the expense (14 percent); would sell something (10 percent); or would rely on one or more means of borrowing to pay for at least part of the expense, including paying with a credit card that they pay off over time (18 percent), borrowing from friends or family (13 percent), or using a payday loan (2 percent).
The ability to come up with $400 in a pinch varied greatly by income:
Only 31 percent of respondents whose household income is under $40,000 would pay the $400 expense using cash or its functional equivalent, whereas 56 percent of respondents in the middle income group and 73 percent of respondents making over $100,000 would pay this way.
Lacking the savings and financial resources to cover emergency expenses can create all manner of undesirable outcomes. And according to the report, many Americans have already learned that the hard way:
- “Just under one-quarter of respondents indicate that they or a family member living with them experienced some form of financial hardship in the year prior to the survey.”
- “Thirty-one percent of respondents report going without some form of medical care in the 12 months before the survey because they could not afford it.”
It’s not a surprise that Americans in lower income brackets would have a more difficult time coming up with cash to cover an unexpected expense equivalent to the cost of the average monthly car payment in the U.S. What is, however, a little surprising is that some 44 percent of middle-class wage earners and 27 percent of those making more than six digits in annual income are running households on such tight margins.
And while there are many potential reasons for higher wage earners to experience cash-flow problems, it’s not unlikely that many fitting the description have economically overextended themselves with living arrangements, student and consumer debt. In fact, the Fed report notes that 1 out of 5 people it surveyed for the report said they had spent more money than they’d earned in the previous 12 months.
The nation’s recent history of mortgage and credit crises makes that a frightening statistic for the economic outlook of tomorrow.
Here’s the full report:
The post Could you come up with $400 in a pinch? It’s likely you know someone who couldn’t appeared first on Personal Liberty.
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