Americans’ Ability to Pay for Emergency Expenses or Three

Jul 12, 2023

The Federal Reserve released the new results of its annual "Survey of Household Economics and Decisionmaking" (SHED) this week.

It includes the infamous section on how American adults would pay for that hypothetical $400 emergency expense, such as a car repair – the results of which are often ridiculously misrepresented in the headlines.

It also includes a section on how Americans would deal with three months of expenses if they lose their jobs.

And this year, the survey had a new question: What is the largest emergency expense individuals could handle right now?

In the report, there are essentially four categories of dealing with an emergency expense:

"Cash or its cash equivalent" is defined by the report as "exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as ‘cash or its equivalent’)."

What is the largest emergency expense individuals could handle right now using only "savings," as opposed to borrowing or selling assets? These are the results:

So, cumulatively, using only "savings," rather than borrowing or selling assets, how much of an emergency expense could they pay for:

And there is a twist the came with the new question: The same survey also asks how they could pay an unexpected $400 expense: 63% said they would pay for it with cash or the equivalent (not borrowing and not selling assets).

And this discrepancy between the 68% who could "handle" an expense of at least $500 to $999 with cash or cash equivalent, and the 63% who would "cover" a $400 emergency expense with cash or equivalent is explained by the Federal Reserve's report, "suggesting that some people do choose to pay with other methods, even if they have cash savings available to them."

The likely explanation, according to the report, is that they want to keep the cash on hand for other emergencies, and that they will borrow or sell assets to cover the current emergency. The report:

"Some of those who would not have paid an unexpected $400 expense with cash or its equivalent likely still had access to $400 in cash. Instead of using that cash to pay for the expense, they may have chosen to preserve their cash as a buffer for other expenses."

That 63% is the same as in 2019. But in 2020 and 2021, the percentage was higher as everyone was floating in a sea of stimulus cash. It has now normalized again.

Only 9% of the adults said they did not expect to pay a credit card bill in full that month, according to the report. For these 9%, credit cards are a borrowing method – and an expensive one. For the rest, they’re just a payment method.

Most people use a credit card as a payment method, not a borrowing method. Roughly $5 trillion a year is spent in the US using credit cards as a payment method, and most of it is paid off by due date and never accrues interest (though it does show up in the credit card balances at month end because it's paid off by due date the month after it was charged). These cardholders just collect their 1% or 2% cash-back and their miles and hotel credits or whatever, and never pay any interest.

The report gives some details about the 37% who would borrow or sell assets to pay for the $400 emergency expense.

As we learned above, some of them have the cash, but choose to keep the cash for other emergencies, and instead sell assets or borrow to pay for the expense.

Some of them have assets that they would sell to get the cash (6%). This might include shares in money market funds that you would have to sell before you can use the cash.

%

16%

9%

6%

2%

2%

The report also found that 13% are unable to pay at all for a $400 emergency expense. These are the truly poor people, they’re at the edge of the cliff every day, and if anything happens to them, they’re in deep trouble – a problem with a tooth, a broken-down car, parking in a handicapped zone on a rainy day when they couldn't see the markings….

An old rule of thumb says that you should have three months of expenses set aside in liquid form – such as in a bank account or money market fund – in case you lose your job and your income stops.

In its survey, the Federal Reserve asked about this and found that:

In other words, 70% would get through this three-month period just fine, either having the cash, or being able to sell assets, or draw on other savings, and some by borrowing. But 30% would be in deep trouble if they have no income for three months.

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