The National Bureau of Economic Research recently released a paper that looked at the “financial fragility” of households. They determined fragility as the inability to come up with $2,000 in 30 days or less.
Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans.
The survey asked a simple question, “If you were to face a $2,000 unexpected expense in the next month, how would you get the funds you need?” In the U.S., 24.9% of respondents reported being certainly able, 25.1% probably able, 22.2% probably unable and 27.9% certainly unable. The $2,000 figure “reflects the order of magnitude of the cost of an unanticipated major car repair, a large copayment on a medical expense, legal expenses, or a home repair,” the authors write. On a more concrete basis, the authors cite $2,000 as the cost of an auto transmission replacement and research that reported low-income families claim to need about $1,500 in savings for emergencies.
With more Americans living paycheck-to-paycheck it can be no surprise why it becomes hard and harder for them to recover from a financial surprise. Without reserves to call upon, the arrival of a $2,000 financial surprise is enough to break the back of the household budget.
I can’t emphasize enough the importance of a regular savings account or emergency fund in to save money in even while you may be trying to dig yourself out of debt.