Board of Governors of the Federal Reserve System

Dealing with Unexpected Expenses

Four in 10 adults in 2017 would either borrow, sell something, or not be able pay if faced with a $400 emergency expense. While still disconcertingly large, the share of families who would struggle with such an expense has decreased over the past five years. In 2013, half of adults could not easily cover such an expense. Even with the improvement, financial challenges remain for many families. One in five adults cannot cover their current month's bills, and one in four skipped a medical treatment in the past year due to an inability to pay.

Small, Unexpected Expenses

Relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without savings. When faced with a hypothetical expense of only $400, 59 percent of adults in 2017 say they could easily cover it, using entirely cash, savings, or a credit card paid off at the next statement (referred to, altogether, as "cash or its equivalent"). Over the past five years, as the economy has recovered, the fraction of families able to easily cover this emergency expense has increased by about 9 percentage points (figure 11).

Among the remaining 4 in 10 adults who would have more difficulty covering such an expense, the most common approaches include carrying a balance on credit cards and borrowing from friends or family (figure 12). Far fewer people would turn to high-cost options, such as a payday loan, deposit advance, or a bank overdraft in these situations.

Inability to pay one's actual bills is another sign of economic vulnerability. Even without an unexpected expense, 22 percent of adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill (table 13). One-third of those who are not able to pay all their bills say that their rent, mortgage, or utility bills will be left at least partially unpaid.

Table 13. Bills to leave unpaid or only partially paid in the month of the survey

Another 11 percent of adults would be unable to pay their current month's bills if they also had an unexpected $400 expense that they had to pay. Altogether, one-third of adults are either unable to pay their bills or are one modest financial setback away from financial hardship, slightly less than in 2016 (35 percent).

Those with less education are also less able to handle unexpected expenses. Of those adults with at least
a bachelor's degree, over 80 percent could handle an unexpected $400 expense on top of their regular bills. By comparison, the same was true for 54 percent of those with a high school degree or less. Racial and ethnic minorities of each education level are even less able to handle a financial setback
(figure 13).

Some financial challenges require a greater level of preparation and advanced planning than a relatively small, unexpected expense. One common measure of financial preparation is whether people have savings sufficient to cover three months of expenses if they lost their job. Half of people have set aside dedicated emergency savings of this level. Another one-fifth say that they could cover three months of expenses by borrowing or selling assets. In total, 7 in 10 adults could tap savings or borrow in a financial setback of this magnitude.

Health Care Expenses

Out-of-pocket spending for health care is a common unexpected expense that can be a substantial hardship for those without a financial cushion. As with the small financial setbacks discussed above, many adults are not financially prepared for health-related costs. During 2017, over one-fifth of adults had major, unexpected medical bills to pay, with a median expense of $1,200. Among those with medical expenses, 37 percent have unpaid debt from those bills. In addition to the financial strain of additional debt, over one-quarter of adults went without some form of medical care due to an inability to pay. This was up slightly from 2016 but still lower than the one-third who skipped medical care due to cost five years ago in 2013 (figure 14).

Dental care was the most frequently skipped treatment (19 percent), followed by visiting a doctor (13 percent) and taking prescription medicines (11 percent). Most of the decline in skipped coverage in the past five years resulted from fewer people skipping dentists' and doctors' visits--although skipping other forms of medical care also declined (table 14).

Table 14. Forms of skipped medical treatment due to cost (by survey year)

Those with less income are more likely than others to forgo medical care due to cost. Among those with family income less than $40,000, 39 percent went without some medical treatment in 2017. This share falls to 25 percent of those with incomes between $40,000 and $100,000 and 9 percent of those making over $100,000.

Health insurance is one way to help families handle the financial burden of large, unexpected medical expenses. In 2017, 91 percent of adults had health insurance. This includes nearly three-fifths of adults who have health insurance through an employer or labor union and just under one-fourth who have insurance through Medicare. Four percent of people purchased health insurance through one of the health insurance exchanges. Those with health insurance are less likely to forgo medical treatment due to an inability to pay. Among the uninsured, 42 percent went without medical treatment due to an inability to pay, versus 25 percent among the insured.²⁹

References

 29. Since the survey asks respondents about their current health insurance status, but also 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