This meme takes many forms. Sometimes, the claim is that 40% of Americans can’t cover a $400 emergency, other times that 39% can’t cover a $1,000 emergency, and perhaps even a whopping 63% don’t have enough savings to cover a $500 emergency! These are alarming claims, but where do these numbers come from and are they accurate?

Two Surveys

The bulk of these claims come from one of two different surveys; the Federal Reserve’s annual report on the Economic Well-Being of U.S. Households, and Bankrate’s Financial Security Index Survey. The Fed survey appears to be much more comprehensive (22,000+ respondents vs. 1,000) and has a better methodology (the Fed uses an online survey, while Bankrate uses phone calls). However, both are done professionally and each have a several year history, the Fed survey dating further back, to 2013.

The Results

As it relates to this meme, the Fed survey question asks what would the respondent do with an unexpected “minor” hypothetical expense of $400, while the Bankrate survey asked how they would deal with a “major” expense of $1000.

Fed Survey Results (data for 2017, published in 2018):

• 59% said they could easily cover the $400 expense with savings, cash or its equivalent.
• Of the 41% who reported more difficulty, 43% said they would pay it with a credit card, 26% would borrow from friends or family, 19% would sell something and the remaining would find other avenues (or be unable to pay).
• Only 29% of those not paying in cash (12% of the total sample) said they would be unable to pay. In other words, 12% (not 41%) reported being unable to afford a $400 emergency.

Bankrate Survey Results (Done in 2019):

• 40% said they could pay a $1,000 emergency expense from their savings, while another 14% could pay by reducing other expenses. This totals 54% that could pay without accruing additional debt.
• 15% reported they would finance with credit card
• 19% would either borrow from family or friends, or take out a personal loan
• 10% would do something else or not be able to pay. It’s unclear from this survey how many couldn’t afford a $1,000 emergency.

Positive Trend

These surveys come out every year, generally with negative headlines highlighting how close Americans are to financial ruin. However, the trend in both surveys has been quite positive over the years, a truth which is often hidden or diminished. For example, just 50% of respondents said they could cover a $400 expense in 2013, which steadily improved to 59% by 2017. The numbers for 2018 won’t be out until May, but it’s likely things further improved considering the continued strong economy and employment rates.

The improvement isn’t just limited to this question either, it’s across the board in almost every economic category. For example:

• 74% of adults reported they were doing ok or living comfortably in 2017, up more than 10 percentage points since 2013.
• All educational levels saw improvement, although not surprisingly the more educated are doing better than the less educated.
• In 2017, 33% reported being better off than a year ago, compared to 15% being worse off (52% were the same). In 2013, 30% reported being better off, while 34% were worse off (more than double 2017 levels).

Meanwhile, other metrics, like percentages with credit card balances, remained roughly the same, as did the percentage of those who saved (55% in both 2013 and 2017). Some of the results are definitely troubling, but the overall trend appears positive, yet few if any headlines reflect this.

Spending “Vices”

A related, but separate survey by Bankrate shows that earners in the lowest income category (under $30,000/yr) reported an average of $2,118 on financial “vices” like restaurant food, prepared drinks (coffee, smoothies, etc.) and lottery tickets. So, even among the lowest earners there appears to be room to cut back and save, or deal with small to moderate financial emergencies if needed.

Conclusion

Both surveys show about 55-60% of Americans could deal with an unexpected emergency expense easily with savings or cash equivalents. For the 40% with more difficulty, most could cover the expense with a credit card or other reasonable means like borrowing from friends or selling personal items. Most wouldn’t consider this “one step from disaster”, more like an unpleasant situation which creates a higher financial risk in the future. Very few (approx 5%) reported needing truly financially disastrous methods like pay-day loans or overdraft protections, and 12% felt they couldn’t cover an emergency. This is still a troubling number, but nowhere near 40% (or 63%!).

There are indeed troubling aspects of these surveys that show poor financial planning among Americans, but the good news is most of the trends are positive.