Board of Governors of the Federal Reserve System

Economic Preparedness and Emergency Savings

A key consideration regarding household finances and overall economic well-being is the ability to withstand financial disruptions. More American families seem to be prepared for both large and small emergencies than was the case in earlier years of the survey. Nevertheless, a sizeable minority of adults still appear ill-prepared for even modest financial emergencies or are carrying debt from recent emergencies that they experienced.

Recent Hardships

The survey asks people whether they or their family experienced any one of eleven kinds of hardship in the previous year that may be associated with financial challenges. Among the hardships included in the survey, health problems are the most frequently experienced, with 12 percent of adults reporting a health problem in the prior year. This is followed by employment-related hardships, with 7 percent of adults reporting that they lost a job and 8 percent reporting that they had their pay or hours cut. Overall, just under one-third of adults report that in the prior year they, or their family living with them, experienced one or more of the eleven hardships included in the survey (figure 11).

Many individuals who experienced a hardship in the prior year indicate that over the same time frame they also drew down savings, undertook some form of borrowing, or both. Respondents who experienced a hardship, and particularly lower-income respondents who experienced a hardship, are more likely to report borrowing through an alternative financial service such as a tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or paycheck advance (table 11). (For additional information on the use of alternative financial services, see the "Banking, Credit Access, and Credit Usage" section of this report.) These respondents who experienced a hardship are also more than twice as likely to have borrowed from, or withdrawn funds from, their retirement account as those who did not experience a hardship. Fifteen percent of non-retirees who experienced a hardship report that they borrowed from and/or cashed out a retirement account in the prior year, whereas 7 percent of those who did not experience a hardship borrowed from and/or cashed out their retirement savings.²²

Table 11. Propensity to use a tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or paycheck advance (by family income and whether experienced a hardship)

Percent

Emergency Savings

Considering individuals' preparedness for potential hardships, there was a continued increase in the stock of emergency savings in 2016 relative to recent years. Nevertheless, the share of adults who are ill-prepared for financial emergencies remains a concern.

First, focusing on large-scale emergency savings, nearly half of adults (48 percent) indicate that they have set aside an emergency or rainy day fund that would cover three months of expenses. It is possible, though, that personal savings alone do not fully reflect the way that individuals prepare for such a large financial disruption. Some people may, instead, expect to borrow or rely on others in these instances. To capture this possibility, respondents who do not have three months of emergency savings are asked the follow-up question, "If you were to lose your main source of income (e.g., job, government benefits), could you cover your expenses for 3 months by borrowing money, using savings, selling assets, or borrowing from friends/family?" An additional 22 percent of respondents indicate that they could cover three months of expenses using this broad array of options.

In total, 70 percent of all respondents report that they would be able to manage a three-month financial disruption. (This figure combines the 48 percent who could cover three months of expenses using their personal savings with the additional 22 percent of adults who indicate they could do so using assets or borrowing.) This is up slightly from 68 percent of respondents in 2015 and 65 percent in 2014 who exhibited this level of preparedness for a three-month emergency.

To determine individuals' preparedness for a smaller-scale financial disruption, respondents are asked how they would pay for a hypothetical emergency expense that would cost $400. This amount reflects the type of expense that one may experience from an unexpected car repair, appliance replacement, or medical bill. Just over half (56 percent) 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 (collectively referred to here as "cash or its functional equivalent"). The remaining 44 percent indicate that such an expense would be more challenging to handle and that they either could not pay the expense or would borrow or sell something to do so.

Specifically, among respondents who would not pay the expense in full using cash or its functional equivalent, 45 percent would use a credit card that they pay off over time and 27 percent simply could not cover the expense. Over a quarter would borrow from friends or family, and smaller fractions would either sell something or use a payday loan, bank overdraft, or bank loan (figure 12).

The 56 percent of adults in 2016 who indicate that they would pay for an emergency expense using cash or its functional equivalent compares to 54 percent who expressed this level of comfort with such an expense in 2015, and 50 percent of adults who did so when the question was first asked in 2013. However, while generally improving over time, the single-year change since 2015 is not statistically significant.

Another way of thinking about short-term economic vulnerability is to consider how an emergency expense would impact each family's ability to pay any other bills. In the absence of an emergency, 76 percent of adults expect to be able to pay all of their current month's bills in full, whereas 23 percent expect to only pay some bills or only make partial payments on their bills. When asked how their ability to pay bills would change if they had a $400 expense that they had to pay, such an emergency would cause an additional 13 percent of adults to be unable to pay their other bills in full. Hence, when these categories are combined, 35 percent of adults report that they would be unable to make all of their other bill payments in full if faced with a $400 emergency.

The approach to paying a $400 emergency expense, as well as the ability to continue paying other bills if faced with such an expense, varies substantially by the level of education of the respondent. Fifty-two percent of respondents with a high school education or less would still be able to pay all of their other bills in full if faced with a $400 emergency. This is well below the 79 percent of those with at least a bachelor's degree who could do so (figure 13).

Additionally, irrespective of their level of education, blacks and Hispanics are less likely to say that they would be able to handle a $400 emergency expense while still covering all of their other monthly bills. While 68 percent of white respondents say that they still would be able to pay all of their other current month's bills in full, 50 percent of blacks and 49 percent of Hispanics would be able to. This is consistent with the broader differences in savings, assets, and net worth by race and ethnicity observed elsewhere in the survey, as well as in other surveys such as the Survey of Consumer Finances.²³

Emergency Spending on Health Care

Although emergency expenses can take many forms, out-of-pocket expenses for health care represent a category of emergency expenses that is of particular concern to many individuals. Twenty-three percent of respondents experienced what they describe as a major unexpected medical expense that they had to pay out of pocket in the 12 months prior to the survey.

Among those who report a major unexpected medical expense, the median out-of-pocket cost was $1,000 and the mean was $2,519. Consistent with the earlier finding that many adults are ill-prepared for modest financial shocks, 42 percent of those who report a major out-of-pocket medical expense in the prior year also indicate that they currently have debt or unpaid balances related to these expenses. This represents approximately 24 million adults who are carrying debt from medical expenses that they incurred over the previous year. The number of adults carrying medical debt from recent out-of-pocket medical expenses is nearly unchanged relative to that seen in 2015.

Many respondents also went without some type of care because they were unable to afford it. Eighteen percent of all adults went without dental care in the prior 12 months because they could not afford it. Twelve percent went without a doctor visit, 11 percent went without prescription medicine, and 9 percent went without a visit to a specialist (figure 14). Overall, 25 percent of respondents report going without at least one of these types of care because they could not afford it. This is a statistically significant improvement compared to the 27 percent of respondents who went without medical care due to cost in 2015, and compared to the 31 percent who did so in 2014.

The likelihood of forgoing medical care due to cost is inversely related to one's income. Among those whose family income is less than $40,000, 36 percent have gone without some form of medical treatment in the preceding 12 months. This fraction is 23 percent among respondents with incomes between $40,000 and $100,000 and 9 percent among those making over $100,000.

One potential avenue for alleviating this inability to cover health care expenses is through health insurance. In 2016, 91 percent of adults reported that they had some form of health insurance. This includes those who had health insurance through an employer or labor union (61 percent), Medicare (22 percent), Medicaid (12 percent), coverage purchased directly from an insurance company (12 percent), and/or received it through another source. Approximately 4 percent of people purchased health insurance through one of the health insurance exchanges.

Those with health insurance are less likely to report forgoing medical treatment due to an inability to pay, although they are not immune from this concern. Among uninsured respondents, 41 percent report that they had gone without some form of medical treatment due to cost in the preceding 12 months. This compares to 23 percent of respondents who have health insurance reporting that they went without some form of medical treatment in the same period.²⁴

 

References

 

 22. The question in the survey about having a hardship was revised in 2016 to better capture the frequency of financial hardships. This change increased the observed prevalence of hardships and, as such, these results are not directly comparable to the results in 2015. Return to text

 23. For additional details on asset holdings by race and ethnicity in the Survey of Consumer Finances, see Federal Reserve Board 2013 SCF Chartbook(September 2014), www.federalreserve.gov/econresdata/scf/files/BulletinCharts.pdf; and Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle, "Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin (September 2014): 1-40. Return to text

 24. Since the survey asks respondents about their current health insurance status, but asks about whether they missed medical treatments in the previous year, it is possible that some respondents who currently have insurance were uninsured at the point at which they were unable to afford treatment. Return to text