Board of Governors of the Federal Reserve System

Dealing with Unexpected Expenses

The overall share of adults who would cover a small emergency expense using cash or its equivalent increased to the highest level since 2013, when the survey began. Despite this positive trend, many still faced difficulty paying monthly bills. Black and Hispanic adults, as well as adults with lower income, disproportionately faced such challenges.

Small, Unexpected Expenses

Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 68 percent of all adults in 2021 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as "cash or its equivalent").³⁵ The remainder said they would have paid by borrowing or selling something, or said they would not have been able to cover the expense.

The share who would pay using cash or its equivalent was up 4 percentage points from 2020 and was at the highest level since the survey began in 2013 (figure 19). This increase is consistent with the results on overall financial well-being and may reflect improving economic conditions and the additional COVID-19 relief measures enacted in 2021.

Like the results for overall financial well-being, parents saw a sharp increase in the share who would cover a $400 expense with cash or its equivalent—up from 56 percent in 2020 to 64 percent in 2021. Those not living with their own children under age 18 saw a smaller increase of 3 percentage points. One reason that parents experienced this sharp increase may be the expansion of the CTC. The most common way parents used their CTC payments was saving them, potentially improving their ability to handle unexpected expenses.³⁶

Those who would not have covered a $400 expense completely with cash or its equivalent (32 percent of adults) may have found it more difficult to handle small, unexpected expenses. For these adults, the most common approach was to use a credit card and then carry a balance, although many indicated they would use multiple approaches (figure 20). Eleven percent of all adults said they would be unable to pay the expense by any means, similar to the 12 percent seen in 2020.

To understand more about covering household expenses, the survey asked about adults' ability to pay their monthly bills. As of October and November 2021, 24 percent of adults indicated that they had, or were close to having, difficulty paying bills for that month: 14 percent of adults had one or more bills that they were unable to pay in full, and an additional 10 percent said they would have been unable to pay their bills if faced with a $400 expense. The 24 percent having difficulty (or close to having difficulty) paying bills was down 3 percentage points from 2020 and down 4 percentage points from 2019. These declines are consistent with improvements seen in overall financial well-being.³⁷

Lower-income adults were especially likely to face difficulty paying bills. Half of adults with a family income less than $25,000 had one or more bills that they were unable to pay in full that month or were one $400 financial setback away from being unable to pay them, compared with 5 percent for adults with a family income of $100,000 or more.

Black and Hispanic adults were much more likely than White or Asian adults to face difficulty paying bills, and these differences were present at all income levels (figure 21). Forty percent of Black adults and 35 percent of Hispanic adults had, or were close to having, difficulty paying bills, compared with 19 percent of White adults and 11 percent of Asian adults.

Looking across income levels shows that, even among adults with a family income of $100,000 or more, Black and Hispanic adults were more than twice as likely as White or Asian adults to face these challenges. Several interrelated factors, including discrimination or differences in credit access, could have contributed to the differences by race and ethnicity. (See box 2 on "Racial and Ethnic Discrimination" in the report Economic Well-Being of U.S Households in 2020 for a discussion of discrimination, and the "Banking and Credit" section for differences in credit access.)³⁸

Some financial challenges, such as a job loss, require more financial resiliency than would an unexpected $400 expense. One common measure of financial resiliency is whether people have savings sufficient to cover three months of expenses if they lost their primary source of income. In 2021, nearly 60 percent of people said they had set aside money specifically as emergency savings or "rainy day" funds, the highest share since the survey began in 2013.

For those who did not set aside money for this purpose, some would have dealt with a loss of their main source of income by borrowing, selling assets, or drawing on other savings. Fourteen percent of adults said that they could have covered three months of expenses in this way. Twenty-seven percent of adults indicated they could not cover three months of expenses by any means.

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 financial setbacks discussed earlier, many adults were not financially prepared for health-related costs at the time of the survey.

Twenty percent of adults had major, unexpected medical expenses in the prior 12 months, with the median amount between $1,000 and $1,999. Fifteen percent of adults had debt from their own medical care or that of a family member (not necessarily from the past year).

Many went without medical care because they could not afford it. Twenty-four percent of adults went without some form of medical care because they could not pay, ticking up from 23 percent in 2020 but well below the 32 percent reported in 2013. Dental care was the most frequently skipped, followed by visiting a doctor (figure 22). Some people also reported skipping prescription medicine, follow-up care, or mental health visits.

The likelihood of skipping medical care because of cost was strongly related to family income. Among those with family income less than $25,000, 38 percent went without some medical care because they couldn't afford it, compared with 9 percent of adults making $100,000 or more.

Ability to afford health care may contribute to the finding that, as family income rises, the likelihood a person reported being in good health increases substantially. Among those in families with income less than $25,000, 75 percent reported being in good health, compared with 92 percent for those in families with income of $100,000 or more.

Health insurance is one way that people can pay for routine medical expenses and protect against the financial burden of large, unexpected expenses. In 2021, 91 percent of adults had health insurance, a slight uptick from 2020. Those without health insurance were nearly twice as likely to forgo medical treatment because they couldn't afford it. Among the uninsured, 40 percent went without medical treatment because they couldn't afford it, versus 22 percent among the insured.

Hardships from Natural Disasters

Those without a financial cushion may face unique and particularly severe challenges in the event of natural disasters. Natural disasters may cause disruptions to people's ability to work, damage to or displacement from their home, or higher bills for heating or cooling. These consequences all require some financial resources to manage, such as a rainy-day fund; access to credit; or support from family, friends, or the local community.

Almost one in six adults (16 percent) were directly affected by a natural disaster during the prior 12 months, meaning that they experienced one or more of the following five events as the result of a natural disaster or severe weather event: (1) an income loss or work disruption, (2) property damage, (3) a temporary evacuation, (4) longer-term displacement from home, or (5) the injury or death of a family member or close friend. The two most common ways that people were affected by natural disasters were property damage, which affected 8 percent of adults, and an income loss or work disruption, which affected 6 percent. Four percent of people had a close friend or relative who was injured or killed by a natural disaster (figure 23).

The effects from natural disasters are not uniform across segments of society. Adults with lower income or less education were more likely to be affected by natural disasters than those with higher income (table 9). Nearly 2 in 10 of those with income below $50,000 reported any disaster-related hardship.

Table 9. Disruptions from natural disasters (by demographic characteristics)

Looking at specific hardships, people with an income of less than $50,000 were more than twice as likely to experience an income loss or work disruption, longer-term displacement from home, or the injury or death of a friend or relative than someone with an income of $100,000 or more. Similar differences were observed across education levels. Black or Hispanic adults were also more likely to be affected by natural disasters than White or Asian adults, both overall and within specific income or education categories.

Overall, most people did not expect their risk of experiencing a natural disaster to change in the near future. Fifty-eight percent of adults assessed their likelihood of experiencing a natural disaster in five years as "about the same" as it is currently. However, 37 percent of adults expected their risk of experiencing a natural disaster to be higher in five years, including 11 percent of adults who assessed their natural disaster risk to be "much higher." Less than 5 percent of adults expected their risk of experiencing a natural disaster to decrease.

In contrast to the overall population who expected their risk from natural disasters would be about the same in five years, most people affected by a natural disaster in the past year expected their risk of a natural disaster to be higher in five years. This includes 20 percent who expected their risk to be "much higher" (figure 24).

Some people undertook mitigation activities to reduce their risks from natural disasters. These mitigation activities differed substantially by homeownership status. Nineteen percent of renters investigated other places to live, which was about twice the rate of homeowners. Conversely, 18 percent of homeowners improved their property to mitigate the risks of disasters (figure 25).

While the risks from natural disasters appear higher for people with less education, these individuals were less likely to engage in natural-disaster mitigation activities (table 10). Twenty-two percent of renters with a bachelor's degree or more investigated other places to live in the prior 12 months because of natural disaster risks, double the 11 percent of renters with less than a high school degree who did so. Homeowners with college degrees were also more likely to improve their properties to reduce natural disaster risks than were those with less education.

Table 10. Natural disaster mitigation activities (by homeownership status, education, and age)

Mitigation activities also differed significantly by age. Younger adults—regardless of whether they were renters or homeowners—were more likely to investigate other places to live because of natural disaster risk and more likely to invest in property improvements than older adults.

Mitigation activities were also much more common among people who expected their risk of experiencing a natural disaster to be higher in five years. Among adults who expected their natural disaster risk to be higher in five years, 28 percent of renters investigated other places to live, and 29 percent of homeowners improved their properties—each about 10 percentage points higher than the comparable rates for all renters and homeowners.

Fewer adults purchased additional insurance to mitigate their natural disaster risk compared with the other disaster mitigation activities asked about in the survey. Overall, 6 percent of renters and 5 percent of homeowners purchased additional insurance in the prior 12 months. While the rates were higher among people who expected their risk of experiencing a natural disaster to increase, they were less than 10 percent for that population.

 

References

 35. However, some who would not have paid 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 (See box 3 from the Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data from April 2020at https://www.federalreserve.gov/publications/files/2019-report-economic-well-being-us-households-202005.pdf.)  Return to text

 36. More detail on the CTC is available in the "Income" section of this report. Return to text

 37. Hispanic adults and parents were two groups that experienced particularly large declines in the share facing difficulty paying bills, similar to results for financial well-being. (See the "Overall Financial Well-Being" section for results on financial well-being among Hispanics and parents.)   Return to text

 38. See Economic Well-Being of U.S Households in 2020, May 2021, https://www.federalreserve.gov/publications/files/2020-report-economic-well-being-us-households-202105.pdf. Return to text

 * The Federal Reserve revised this report on August 22, 2022, to reflect corrected data described below.
On page 38, in the Health-Care Expenses section, figure 22, “Forms of medical treatment skipped because of cost during 2021,” data were corrected for the entry “Dental care” from 13 percent to 17 percent and for the entry “Seeing a doctor or specialist” from 17 percent to 13 percent.