Poll: nearly 4 in 10 Americans would borrow to cover a $ 1,000 emergency

Many of us would be in trouble if we had to foot the bill for an unforeseen expense.

Bankrate’s January Financial Security Index survey found that just four in 10 American adults (41%) would cover the cost of a $ 1,000 car repair or emergency room visit by saving money. The findings echo what previous studies of bank rates and others – including the Federal Reserve and Pew Charitable Trusts – have found about Americans’ lack of savings for rainy days.

The higher your household income, the more likely you are to use your savings to pay for unforeseen costs. This is true for nearly six in ten households (59%) that earn $ 75,000 or more per year.

Men (45%) were more likely than women (38%) to say they would use their savings for the unexpected. And when their backs are against the wall, only 36% of millennials would turn to emergency funds to pay $ 1,000 (compared to 41-44% of older people who would say the same).

Main conclusions:

  • Bank rate reports indicate that the percentage of American adults who would use their savings to cover an emergency room visit or a $ 1,000 car repair has remained in the range of 37% to 41% since 2014.
  • Almost four in ten Americans (37%) would borrow money to some extent if hit by an unexpected bill.
  • Among respondents who reported that they or a close relative paid a major unexpected expense in the past year (28%), the average cost was $ 3,518.

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Face the unexpected

When in a hurry, those lacking in emergency savings look to other methods to make ends meet.

Compared to those with higher incomes, households in the lowest income bracket were more likely to say that they would borrow from family members or friends if they were faced with a $ 1,000 emergency. This is true for one in four families earning less than $ 30,000 per year (compared to 7% among households in the highest income bracket).

The least educated survey respondents (10%) were more likely to say they would use a personal loan to cover an unexpected expense than the more educated adults (2%). And women (15%) were slightly more likely than men (11%) to say they would cut back and cut spending if they found themselves strapped for financial resources in a crisis.

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Overall, for adults who don’t have enough savings to cover a $ 1,000 emergency, the most common alternative is to use a credit card. It was the preferred payment method for 16% of Americans. Going into debt to face a rainy day can be expensive.

“But it comes at a high cost, because the average expense of $ 3,500 funded at the national average credit card rate of 17% would require monthly payments of $ 125, which would take three years to pay off and incur nearly $ 1,000. $ in finance charges, “says Greg McBride. , CFA, Chief Financial Analyst of Bankrate. “Whatever savings you can accumulate, they act as a buffer against high cost debt when unforeseen expenses arise. “

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Many face unforeseen costs

More than one in four American adults (28%) say they or a member of their immediate family have had major unforeseen expenses in the past 12 months.

College graduates (33 percent) were more likely than high school graduates or dropouts (21 percent) to say that they or their families had suffered unforeseen costs in the past year. Not surprisingly, parents (34 percent) were more likely than non-parents (26 percent) to say they had had a big bill in the past year that they didn’t expect to pay.

Of course, it’s unclear who will have to replace a dying car engine or transport a child to hospital in an emergency.

The Pew Charitable Trusts, which has published reports on financial shocks in recent years, notes that only one can have a lasting impact on a household. Depending on income level, a single financial shock “can create a ripple effect,” explains Karen Kavanaugh, Pew’s financial security and mobility project manager. “In other words, one shock can lead to another as a family tries to recover.”

The high cost of emergency spending

Emergencies are often not cheap. Among survey respondents who reported that they or their family members experienced an unexpected expense in the past 12 months, the median amount of the largest expense was $ 1,750.

Three in 10 adults (29%) said they or their family members spent at least $ 5,000 in the past year to cover an unforeseen cost. Almost one-third (32%) of the lowest-paying households spent $ 5,000 or more, compared to 28% of the highest-paying households.

For millennials, the median ($ 1,750) and average ($ 2,951) amounts spent on major unexpected expenses in the past 12 months were lower than for members of the older generations. For each of the others, the median amount spent was $ 3,750. The average amounts were $ 3,726 for Generation X, $ 3,978 for Baby Boomers and $ 4,091 for Silent Generation.

“A lot of this is due to lower monthly expenses,” says McBride. “If you rent a unit with two roommates within walking distance of work, you will generally be less exposed to big unforeseen expenses than the middle-aged homeowner who has a flat tire, turns off a water heater or finds the kids outside. need braces.

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Prepare for the worst

Even though the economy has improved over time, Americans have not improved their savings.

“High household spending and stagnant income can limit the savings you can save,” says McBride. “But the main reason is that saving is just not a high enough priority for households to cut spending or automate saving to make it happen. The first step is the most important.

Companies like Prudential Financial have started offering employees access to parallel savings accounts, giving them the ability to set aside funds for emergencies in addition to saving for retirement through a 401 (k) account. or another employer sponsored account. In the absence of such programs for many other workers, however, most Americans must take it upon themselves to save adequately for the unexpected.

It’s like making a habit of saving, says McBride.

“Establishing the habit through direct deposit of your paycheck or automatic transfer from registration to savings is of critical importance, especially if you are starting from a position with little or no savings,” explains McBride. “If you wait until the end of the month and try to save what’s left, too often there’s nothing left. Becoming a good saver is not just a simple switch that you flip one day.

Cutting back on spending – what 13% of Americans do when faced with unexpected expenses – is also an option for families hoping to quickly increase the emergency fund in their savings account. Bryan Bibbo, senior advisor for the JL Smith Group in Avon, Ohio, recommends eliminating unnecessary costs by taking simple steps like negotiating utilities, shopping at more affordable grocery stores, and finding insurance.

“Find ways to save money on every level,” adds Bibbo. “The idea here is not to make major changes in every aspect of your life, but rather to make minor changes that will save a few dollars which, when totaled, will result in a decent amount saved. “

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This study was carried out for Bankrate by telephone by SSRS on its Omnibus survey platform. The SSRS Omnibus is a national, weekly, dual frame, bilingual telephone survey. Interviews were conducted from December 30, 2019 to January 5, 2020 with a sample of 1,015 respondents in English (980) and Spanish (35). Telephone interviews were conducted by landline (307) and mobile (708, including 470 without a landline). The margin of error for the total respondents is +/- 3.39% at the 95% confidence level. All SSRS Omnibus data is weighted to represent the target population.

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