Published May 25, 2011
So much for that old golden rule of having three-month's salary saved up for a rainy day. According to a recent study, if an unexpected emergency warranted nearly half of American households couldn't come up with $2,000 in 30 days.
In a recent study "Financially Fragile Households: Evidence and Implications," published by the National Bureau of Economic Research, 28% of respondents said they "certainly" would not be able to put together the $2,000 in 30 days, while 22% said they "probably" would be unable to do so. These respondents were in households making between $100,000 and $150,000 annually.
The study was conducted among a random sample of 2,100 adults. It asked, "How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?"
The study also found that 19% of respondents would rely, at least partially, on pawning or selling possessions or taking payday loans.
Study leader, Annamaria Lusardi of the George Washington School of Business, said America puts so much emphasis on financial security in the long-run for retirement that people don't see the importance of saving for short-term needs.
"People are really not able to buffer themselves against a potentially small shock," Lusardi said. "This speaks to why it's so hard and painful if you don't have a buffer."
Although this was not included in the study, Lusardi said it is her own belief that the saving trend has been zero toward savings, and prior to the recession, the economy was running on credit. Those who do not have a precautionary fund rely on borrowing, however things have changed since the economic tornado.
"We have less opportunity now to rely on borrowing, because credit was also related to housing. Now with negative equity, that has gone away," she said. "You don't want to borrow at a high interest rate when a shock happens. That strategy is a dangerous strategy."