Paycheck to Paycheck

Tuesday, April 26th, 2016

Since 2013, the federal reserve board has conducted a survey of American consumers. One question makes it clear just how many middle-class Americans are living paycheck to paycheck:

The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.

Americans are financially fragile. Neal Gabler calls this embarrassing condition financial impotence:

A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings to replace a month’s worth of lost income, and that of the 56 percent of people who said they’d worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses. A similar study conducted by Annamaria Lusardi of George Washington University, Peter Tufano of Oxford, and Daniel Schneider, then of Princeton, asked individuals whether they could “come up with” $2,000 within 30 days for an unanticipated expense. They found that slightly more than one-quarter could not, and another 19 percent could do so only if they pawned possessions or took out payday loans. The conclusion: Nearly half of American adults are “financially fragile” and “living very close to the financial edge.” Yet another analysis, this one led by Jacob Hacker of Yale, measured the number of households that had lost a quarter or more of their “available income” in a given year — income minus medical expenses and interest on debt — and found that in each year from 2001 to 2012, at least one in five had suffered such a loss and couldn’t compensate by digging into savings.

Credit cards are just too tempting:

If you ask economists to explain this state of affairs, they are likely to finger credit-card debt as a main culprit. Long before the Great Recession, many say, Americans got themselves into credit trouble. According to an analysis of Federal Reserve and TransUnion data by the personal-finance site ValuePenguin, credit-card debt stood at about $5,700 per household in 2015. Of course, this figure factors in all the households with a balance of zero. About 38 percent of households carried some debt, according to the analysis, and among those, the average was more than $15,000. In recent years, while the number of people holding credit-card debt has been decreasing, the average debt for those households carrying a balance has been on the rise.

More disturbing stats:

The personal savings rate peaked at 13.3 percent in 1971 before falling to 2.6 percent in 2005. As of last year, the figure stood at 5.1 percent, and according to McClary, nearly 30 percent of American adults don’t save any of their income for retirement.

“If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.”

One thing economists adduce to lessen this responsibility is that credit represents a sea change from the old economic system, when financial decisions were much more constrained, limiting the sort of trouble that people could get themselves into — a sea change for which most people were ill-prepared.

It is ironic that as financial products have become increasingly sophisticated, theoretically giving individuals more options to smooth out the bumps in their lives, something like the opposite seems to have happened, at least for many. Indeed, Annamaria Lusardi and her colleagues found that, in general, the more sophisticated a country’s credit and financial markets, the worse the problem of financial insecurity for its citizens. Why? Lusardi argues that as the financial world has grown more complex, our knowledge of finances has not kept pace. Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates.


  1. Dave says:

    Gee maybe ‘sophisticated’ finance companies focus on fleecing the poor and unsophisticated?

  2. Cassander says:

    Credit and savings are, to some extent, substitutable goods. A world where everyone has $400 in savings that they only use for emergencies is, economically, more or less identical to one where everyone has access to a $400 line of credit that they only use in emergencies. As credit becomes more ubiquitous, we should expect savings rates to fall, and that’s not necessarily a bad thing.

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