Only 1 in 4 Americans Confident They Could Cover Unplanned $2,000 Expense

15 january 2013

Would you be able to come up with $2,000 within a month to cover an unplanned expense? This is the question a group of researchers asked in a recent study, the results of which were published this spring. The response was disheartening; 27.9% of those surveyed said they were certainly unable to, 22.2%  were probably unable to, 25.1% were probably able to, and only 24.9% reported that they would certainly be able to cope with this surprise expense.

The authors (Annamaria Lusardi, Daniel Schneider and Peter Tufano) quote the most recent Survey of Consumer Finances, which showed that “as many as 42.4% of Americans have $2,000 or less in those liquid assets.”  This is no surprise, since study after study has found Americans don’t save very well.

The most interesting part of the study, however, was exploring just how the respondents would come up with the money; a pecking order, in other words. Those surveyed were presented with 15 options:

• Draw from savings
• Liquidate or sell investments
• Liquidate some retirement investments, even if required to pay a penalty
• Borrow or ask for help from my family
• Borrow or ask for help from my friends
• Use credit cards
• Open or use a home equity line of credit or take out a second mortgage
• Take out an unsecured loan
• Get a short term payday or payroll advance loan
• Pawn an asset I owned
• Sell things I owned, except my home
• Sell my home
• Work overtime, get a second job, or other household member increase work
• Other
• Don’t know

Among all those surveyed, the pecking order for how they would deal with a $2,000 unplanned need for cash was (because people could choose more than one strategy, the totals add up to more than 100%)

1. Draw from savings: 53.4%
2. Borrow or ask for help from my family: 29.6%
3. Work overtime, get a second job, or other household member increase work: 22.9%
4. Use credit cards:  20.9%
5. Sell things I own, except my home: 18.8%

The least popular options were:

1. Sell my home: 0.4%
2. Liquidate or sell investments: 2.3%
3. Get a short term payday or payroll advance loan:  3.6%
4. Open or use a home equity line of credit or take out a second mortgage: 4.3%
5. Take out an unsecured loan: 7.1%

I was surprised that asking a family member for the money outstripped putting the debt on a credit card. I was also surprised that the payday loan was so unpopular, since there seem to be more of these vendors in my hometown than gas stations.

Think this is a problem with the poor only? Think again. The study found that 24.6% of households bringing in $100,000 to $150,000 a year felt they would be unable to come up with the $2,000. Women, those with children and those living with their parents were particularly vulnerable to this setback. Those with some education in finance or economics were less vulnerable.

The same question was asked of people in several other countries, by the way and the results don’t favor the U.S.:

Certainly able to cope:

• U.S.: 24.9%
• UK : 24.1%
• France: 36.2%
• Germany: 30.7%
• Canada: 44.3%
• Italy: 48.2%
• Portugal: 31.0%
• Netherlands: 57.7%

How prepared would you be to cover an unexpected $2,000 expense? How would you raise the money?