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A Staggering Number of U.S. Households Can't Cover a $1,000 Emergency Expense, Survey Shows

By Sean Williams - May 28, 2016 at 8:16AM

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Are you among the majority of American households that would struggle to pay an unexpected bill?

Think about this for a moment: If an unexpected expense arose -- your car breaks down, your home's central air system needs repair, or you need a medical procedure -- and it totaled $1,000, would you be able to cover it? If you said no, you're far from the minority.

A majority of Americans can't cover a $1,000 emergency expense

According to a study released last week by the Associated Press and NORC at the University of Chicago, a surprisingly large number of households, even higher-income households, would struggle to pay a $1,000 bill if an emergency arose. AP-NORC's poll showed that 75% of households making less than $50,000 couldn't pay a $1,000 emergency expense. What's more, the number of households unable to cover a $1,000 bill shrinks minimally to 67% for those with annual incomes of between $50,000 and $100,000. Even in households bringing in more than $100,000 annually, 3 in 8 suggested they'd struggle to scrape together $1,000.

Additionally, AP-NORC probed respondents to figure out how they would pay for an emergency. While a majority of respondents planned to use cash, a third said they'd have to borrow money from a friend or family member, or put the expense on a credit card. Another 13% suggested they would skip paying other bills in order to cover the emergency expenses. Finally, 11% simply said they'd skip paying the emergency bill.

Image source: Flickr user Dan Moyle.

Should this data surprise us? Probably not, given that the U.S. personal savings rate of 5.4% as of March, per the St. Louis Federal Reserve, is substantially lower than the personal savings rate we see in other developed countries like Germany and France. Americans are spenders, not savers, and it's their spending habits that have fueled consumption to comprise 70% of U.S. GDP.

Plus, this isn't the first time we've been told about the sketchy saving habits of the American public. A study released last year by the Federal Reserve showed that nearly half of all respondents (47%) would struggle to meet a $400 emergency expense.

Three reasons behind America's pitiful savings habits

What's to blame for the hideous balance sheets of American households? It likely falls on three factors.

First, household wages aren't rising much on a real basis, while a number of other key costs are soaring through the roof. Based on a study conducted by Pew Research Center between 1964 and 2014, even though nominal wages have risen eightfold over 50 years, real wage growth that factors in inflation rose by just 8%. In addition, key costs are dramatically outpacing the official rate of inflation. According to Bloomberg's data from 2012 going back to 1978, the cost of college tuition is 12 times what it was, and medical expenses are now seven times as high. Inflation, based on the Consumer Price Index, has just more than tripled over the same period, lagging the rate of gains in those categories. It's very difficult for U.S. households to contend with inflation that's vastly outpacing wage growth.

Image source: Flickr user Bryan Rosengrant.

Secondly, America has a bit of a debt problem. Data from the Federal Reserve Bank of Boston between 2011 and 2012 showed that, based on 2014 U.S. Census data, some 167 million American adults are carrying at least one credit card apiece -- and the average credit card debt per household in the U.S. hit $7,879 in the fourth quarter of 2015 according to the latest Credit Card Debt Study from CardHub. This is the highest level of debt the average American household has carried since the first quarter of 2009, and it's a sign of our reliance on debt to fuel our consumer-based habits. Note that this data doesn't even touch on the subject of mortgage-based debt, which totaled nearly $10 trillion nationwide for one-to-four family households as of Q4 2015.

Finally, a lot of Americans have a "save later" attitude. We certainly don't need to look for too long to find confirmation of this. Recently, GoBankingRates asked three separate age groups (millennials, Generation X, and baby boomers/seniors) how much they'd saved for retirement, giving them a list of ranges to choose from. Some 56% of Americans in the survey had saved less than $10,000 toward their retirement, with a full one-third (33%) reporting not one red cent saved toward retirement. Workers today either expect to work longer into their golden years, or they (incorrectly) assume that since they'll be working for decades, they can postpone their savings until later.

Change your thinking

What Americans need to do is completely change their thinking, because the longer they wait to change their saving and investing habits, the more time will shift from their friend to their enemy.

Image source: Pixabay.

The elephant in the room in addressing America's poor savings habits is that far too many households aren't keeping detailed budgets. A Gallup poll conducted in 2013 showed that only 32% of all U.S. households were keeping detailed records of income and expenditures on a month-to-month basis. The importance of a budget cannot be overstated. If you and your family don't have a firm understanding of where your income is going, it becomes practically impossible to optimally put money aside for an emergency fund and/or save for retirement.

The good news is formulating a budget can be simple, although you'll need some follow-through to make it work. Software can handle most of the grunt work these days when it comes to budgeting, requiring you to simply enter your monthly income and expenditures. By inputting your desired savings amount, budgeting software can often help you conjure up an effective savings game plan.

However, sometimes it takes going that extra mile, which is why it may be handy to have separate accounts handy (i.e., entertainment and food) so you truly understand the parameters of what's available to spend in certain categories each month. Trying to save money can be tough if all of your money is in one bank account and additional funds appear available, so something as simple as keeping cash in separate jars for your monthly entertainment and food budgets can help keep you from overspending.

Americans also need to reverse their "save later" mentality, because it's crushing their ability to compound what they actually do manage to save. Waiting even a few years to save and invest can push your retirement out a decade or beyond.

For instance, if you were to invest $1,000 a quarter beginning at age 20 for a period of 45 years at an average return rate of 7% (the historical return of the stock market), using Bankrate's return on investment calculator with the parameters of a 25% federal tax rate, 6% state tax rate, and 3% inflation rate, you'd have nearly $1.2 million at age 65. If you waited even five years to begin saving and investing $1,000 per quarter (so 40 years' worth of investing instead of 45), you'd enter retirement with around $350,000 less in your nest egg. That's a big difference for waiting just five years, and it demonstrates that waiting to save and invest is a truly bad idea.

The lesson here is simply that Americans needs to be proactive about their emergency fund and retirement savings. If you haven't taken the steps needed to give yourself an emergency cushion, perhaps today is the day to correct that concern.

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