Thursday, May 26, 2011

No Emergency Fund

Most people, even wealthy people, have less money than you would think. A story, “Many don’t have $2,000 for a rainy day”:

Half of Americans say they aren’t prepared for a minor financial emergency.

A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch, for example in the event of an unanticipated car or home repair, a large medical bill or legal expenses.

The average American faces a loss of liquidity, at least temporarily, if surprised by a relatively minor problem. The study specifically looked at the sum of $2,000, but obviously, many minor emergencies cost more than that. Most people think of emergencies as personal situations, but a larger emergency may affect millions of people at once. When people are living close to the edge as it is, any economic shock, even something as routine as a hurricane evacuation, can find them without the flexibility to respond.

Much has been made of the lack of liquidity in the banking system, the late insolvency of the federal government, and the absence of consensus on any problem at all in Congress, all of which give the country less than its usual ability to respond to a minor economic shock. Based on this study, consumers are not doing much better, and will not be able to do much to save the country if an economic emergency occurs.