Rosalind Evans
Many worry about their financial stability as Americans grapple with rising living costs. However, a recent study by the JPMorgan Chase Institute reveals a more optimistic outlook. The research indicates that most households can manage a moderate financial shock, such as an unexpected $400 expense.
Resiliency Amid Rising Costs
Higher prices have strained many American budgets, leading to concerns about financial resilience. According to Chris Wheat, president at JPMorgan Chase Institute, “We hear questions all the time like, ‘Are people living paycheck to paycheck?’” The study analyzed anonymized banking data from 5.9 million households and found that many Americans can absorb a $400 expense without severe disruption.
How Households Manage Surprise Expenses
The Federal Reserve previously found that 13% of adults would struggle with an unexpected $400 cost in 2023. In contrast, JPMorgan Chase Institute’s analysis shows that only 8% of individuals cannot cover such an expense. This figure includes those who rely on a mix of cash, disposable income, and short-term credit. The proportion of households unable to handle a $400 emergency has remained stable over the past two years.
Preferred Methods for Managing Financial Shocks
Most families—92%—can handle a $400 “expense shock” through cash savings, disposable income, or credit. Specifically, 67% of households can cover the expense entirely with cash savings, while 20% use a blend of cash and disposable income. Another 3% use cash, disposable income, and credit cards without accruing interest, and 2% rely on money, disposable income, and credit that can be paid off within three months.
The Pitfalls of Using Credit
Despite the ability to cover short-term expenses, relying on credit can lead to long-term debt. Ted Jenkin, a certified financial planner and CEO of oXYGen Financial, emphasizes the importance of maintaining a cash reserve. “There’s good debt and … there’s bad debt,” Jenkin notes. “But to me, almost all debt, maybe except having a long-term mortgage, is bad debt.” Building an emergency fund, ideally covering three to six months of living expenses, is crucial.
Tips for Building an Emergency Fund
Jenkin offers several strategies to bolster financial security:
– Apply the Rule of Thirds: Allocate one-third of any extra income to taxes, one-third to enjoyment, and one-third to savings. This approach helps manage debt and build an emergency fund.
– Bank Extra Paychecks: Many people receive three paychecks in two months of the year. Saving this extra paycheck can significantly enhance your emergency reserve.
– Utilize Unused Gift Cards: Convert unused gift cards into cash through platforms like Raise or CardCash. Although the exchange might not be dollar-for-dollar, it’s a practical way to increase your savings.
While many households are well-prepared to handle moderate financial shocks, maintaining a robust emergency fund remains essential. By adopting these strategies, individuals can better navigate unexpected expenses and enhance their financial stability.
