Americans’ Precarious Financial Lives

60 percent of Americans have struggled with a financial emergency in the last year, says new research from the Pew Charitable Trusts.

Could you weather an unexpected financial shock – a broken bone, a leaky roof, a trip to the hospital or a layoff at your company?

Financial emergencies like these are distressingly common for American families, according to new research by the Pew Charitable Trusts. In a survey of more than 7,800 U.S. households, Pew found that 60 percent of Americans have experienced a financial shock – such as a major home or car repair, an illness or a pay cut – within the last 12 months. The median cost of these emergencies: $2,000.

Moreover, the impact of a single financial shock can reverberate through a family’s finances for months. Pew found that nearly half of households who suffered a financial crisis still hadn’t fully recovered their finances six months later, and more than half found themselves “destabilized” by the shock – having trouble making ends meet.

“The proportion of shocks that was destabilizing was a surprise to us,” said Pew Research Officer Clinton Key. “The other thing that was surprising was the number of high-income households – households we generally don’t worry about when we think of financial precariousness or financial instability – that were destabilized by financial shocks.”

Source: Survey of American Family Finances, Pew Charitable Trusts

According to Pew, affluent households – those with incomes greater than $85,000 a year – experienced financial shocks at roughly the same rate as poorer households. But while the size of the expense faced by wealthier households was also proportionally bigger – a median of $3,000 – the long-term impact on lower-income households was much greater. While financial shocks cost wealthy families the median equivalent of 10 days’ income, low-income families earning $25,000 or less a year lost the equivalent of 31 days of income.

The other group less likely to rebound quickly from a financial crisis was millennials. Pew’s survey found that 69 percent of millennials reported struggling financially after a shock, compared to 51 percent of Baby Boomers and 59 percent of Gen X-ers.

The reason, said Key, is that “younger households have lower savings and less access to safe and affordable credit than older households that have had more time in the labor market.”

Source: Survey of American Family Finances, Pew Charitable Trusts

Pew’s research adds to a growing mountain of evidence that Americans’ financial lives are increasingly precarious. Earlier this year, the JP Morgan Chase Institute released a study on the month-to-month and year-to-year financial “volatility” experienced by U.S. households, while the U.S. Financial Diaries project, sponsored by the NYU Wagner Financial Access Initiative and The Center for Financial Services Innovation, found that severe swings in income and expenses present a major challenge for low-income families.

“Households have very thin cushions of personal savings to insulate them from downturns and unexpected events,” said Pew’s Key. “The consequences are profound for households of all types.”

These consequences include not just extra credit card debt or depleted savings but broader impacts on a family’s ability to move up the economic ladder.

For example, a single financial shock could even potentially put a child’s college hopes into jeopardy. According to Pew’s study, the median household that experienced a financial shock had $4,000 less in liquid savings than households that did not. Other research finds that children growing up in households with savings are significantly more likely to attend college than households who do not.

The prevalence of American financial “precarity” goes a long way toward explaining the persistent anxiety that has dogged American households since the Great Recession and that is fueling the public revolt against growing inequality.

It also points to a yawning gap in public policy aimed at promoting “emergency savings” so that families can better weather a financial crisis. While federal tax policy generously supports such static goals as owning a home or saving for retirement, it makes no provision for the ups and downs that form the fabric of Americans’ everyday lives.

“If the status quo were working, we wouldn’t see the destabilizing effects of the shocks that we see,” said Pew’s Key. “What the data make clear is that there’s a need for all households at all incomes [to get] support in developing additional emergency savings.”

Anne Kim

Anne Kim is Senior Writer at the Washington Monthly.