You’ve all heard the statistic that 40% of Americans don’t have $400 for an emergency. That seems pretty dire! $400 is not that much money in the grand scheme of things. In many cases $400 would not cover rent, a maintenance bill, or even groceries for the month. If this statistic is to be believed, this leaves over 130 million Americans just one step away from financial ruin. So where did this 40% figure come from and is it true?
Page 21 of the Report on the Economic Well-Being of U.S. Households in 2017 starts off by saying “Four in 10 adults in 2017 would either borrow, sell something, or not be able pay if faced with a $400 emergency expense.” News outlets and politicians have run with this to say that 40% of Americans don’t even have $400 in the bank. It makes for a pretty catchy headline and newspapers exist to be sold. But you know what they say, “There are three kinds of lies: lies, d***** lies, and statistics.”
“There are three kinds of lies: lies, d***** lies, and statistics.”
Anonymous
There are problems with all statistics, which is why the methodology must be published alongside the survey. This is also why there are entire classes devoted to statistical bias. In this case, the survey was about how the respondents would choose to pay a $400 emergency expense, and they were allowed to pick more than one answer. The actual responses add up to more than 100%.
The actual data can be seen here.
Question EF3
Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense? If you would use more than one method to cover this expense, please select all that apply.
The total adds up to 143% so obviously this data is flawed. The 40% number is taken from the adding all of the responses that weren’t “Put it on my credit card and pay it off in full at the next statement” or “With the money currently in my checking/savings account or with cash”. These answers together comes in at 59%. 59% divided by 143% comes out to about 41%.
So the math works out, but does it make sense? What if one participant surveyed responded with “With the money currently in my checking/savings account or with cash” and another marked all of the responses? They would both be able to pay a $400 bill with cash, but the “percent of respondents who would either borrow, sell something, or not be able pay if faced with a $400 emergency expense” would be 7/10 or 70%. See how disingenuous that is?
A better gauge of the American financial situation might be seen in question EF5.
Question EF5A. Which best describes your ability to pay all of your bills in full this month? 78% responded with “Able to pay all of bills”.
Question EF5B. How would a $400 emergency expense that you had to pay impact your ability to pay your other bills this month? 85% responded with “Would still be able to pay all bills”.
Why would more people be able to pay all of their bills after a $400 emergency than before? This just adds to my suspicion that the 40% number is flawed. It’s possible that Question EF5B is only asked of the 78% who affirmatively in part A, but the report does not say that.
This report was cited later that year in a study by Neil Bhutta and Lisa Dettling, which found that 76% of families have at least $400 in liquid savings, and 40% have at least 3 months of expenses saved up. This directly contradicts the commonly quoted 40% number.
The original question was asking how the respondent would pay a $400 emergency expense, not whether they had the cash to pay it. While the answers are probably correlated with general financial health, there are plenty of reasons why someone who had the money would choose not to pay for an unexpected bill in cash. This survey isn’t saying that 40% of Americans don’t have $400 to pay for an emergency.
How bad are the typical family’s finances?
America’s finances are not great, that’s definitely true. For example the average household has $6,270 in credit card debt. That’s a shocking amount considering the average interest rate on credit cards is 18%. But it’s not all bad news, 47% of respondents in this study said they have never carried an unpaid balance on their credit cards. Almost half of Americans have never had credit card debt!
The FIRE movement has gained considerable traction in the last few years, and between that and the pandemic Americans’ personal savings rates have shot up. The average savings rate for 2020 was 16% and the high in April 2020 was 33.7%! That’s almost 5 times as much as the ~7% it had been at for the previous 5 years.
If the personal savings rate stayed at 16% everyone could afford to retire early assuming they invested those savings. So I think that while Americans in general are bad at delayed gratification and that clearly manifests itself in their financial situation, the actual truth is much brighter than we’re being led to believe.
Furthermore when looking at the Economic Well-Being survey from 2019 (two years later), the percentage of people who could pay cash for a $400 pop-up expense has actually increased by 28% over the last 7 years. That’s good news! Americans are getting better financially! But good news doesn’t sell headlines, so you’re probably going to keep seeing doom and gloom. At least now you’re prepared.
What do you think? Is the typical American drowning in debt or is the mainstream media more interested in clicks than truth? Let us know in the comments below!
