Dealing with Unexpected Expenses
Many adults were not well prepared to withstand even small financial disruptions in 2019, though the ability to handle unexpected expenses had improved markedly since 2013. Despite the positive trends, financial challenges remained, especially for those with less education as well as for minorities. This highlights the potential for financial disruptions to families' finances from even a relatively short period of lost wages.
Small, Unexpected Expenses
Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of adults in 2019 said they would cover it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as "cash or its equivalent")—a 2 percentage point increase from 2018 (figure 14). In 2013, half of adults would have covered such an expense in this way. As discussed in the "Financial Repercussions from COVID-19" section of this report, the share of all adults who would pay using cash or its equivalent was nearly unchanged in April 2020, although those who lost a job or had their hours reduced were less likely to indicate that they would pay the expense in this way.
The remaining 37 percent of adults who would not have paid completely with cash or equivalent may have had more difficulty covering such an expense. For these adults, the most common approach was to pay for the expense using a credit card and then carry a balance (figure 15). Twelve percent of adults said they would be unable to pay the expense by any means. However, it is possible that some who would not have paid with cash or its equivalent still had access to $400 in cash. Instead of using that cash to pay for the expense, they may have chosen to preserve their cash as a buffer for other expenses (see box 3).
To understand more about covering household expenses, the survey asked about adults' ability to pay their actual monthly bills. Nearly 3 in 10 adults were either unable to pay their monthly bills or were one modest financial setback away from failing to pay monthly bills in full. Sixteen percent of adults did not expect to pay all of their bills in full in the month of the survey in October 2019. An additional 12 percent said they could cover their current bills, but would not have been able to do so if they faced a $400 unexpected expense on top of their current bills.22
Of people who could not fully cover their monthly bills in late 2019, this most frequently involved not paying a credit card bill or making only a partial payment on it (table 9). Yet, nearly 4 in 10 of those who were not able to pay all their bills in the month of the survey (6 percent of all adults) said that their rent, mortgage, or utility bills would be left at least partially unpaid.
Table 9. Bills to leave unpaid or only partially paid in the month of the survey
|Bill type||Among those who expect to defer at least one bill||Among adult population|
|Rent or mortgage||23||4|
|Water, gas, or electric bill||32||5|
|Phone or cable bill||34||5|
Note: Respondents could select multiple answers.
Those with less education, in particular, exhibited more challenges in meeting these expenses. Thirteen percent of adults with a bachelor's degree or more did not expect to pay their current month's bills in full or would have been unable to do so if faced with an unexpected $400 expense, versus 43 percent of those with a high school degree or less. Racial and ethnic minorities at each education level were less well-positioned to handle a financial setback (figure 16). A number of factors, including differences in educational backgrounds or returns to education, discrimination, or differences in credit access, could have led to this difference. (See the "Higher Education" section of this report for a discussion of education, the "Overall Economic Well-Being in 2019" section for a discussion of discrimination, and the "Banking and Credit" section for a discussion of disparities in credit access).
Furthermore, those carrying unpaid debts—including unpaid medical and legal bills—were less able to handle monthly expenses at the time of the survey. For example, 57 percent of those with outstanding medical bills could not have covered their monthly bills or would have had difficulty doing so when faced with an unexpected $400 expense. A lower 22 percent of people without such debts had difficulty covering their monthly bills. Fewer adults with student and credit card debt had difficulty covering monthly bills than those with medical or legal debts. Thirty-six percent of those with credit card debt and 42 percent of those with student loan debt could not have covered all of their current monthly expenses.
Some financial challenges require more preparation and advanced planning than would a relatively small, unexpected expense. One common measure of financial preparation is whether people have savings sufficient to cover three months of expenses if they lost their primary source of income. As of late 2019, 53 percent of people had set aside money specifically as emergency savings or "rainy day" funds. For those who did not, some would have dealt with a larger shock by borrowing or selling assets or drawing on other sources of savings. Eighteen percent said that they could have covered three months of expenses in this way. In 2019, 3 in 10 adults said they could not cover three months of expenses by any means.
Box 3. The Credit Card Debt Puzzle
In 2019, 37 percent of adults said that they would not completely use cash or a cash equivalent to cover a $400 emergency expense. For some people, this reflects that they did not actually have $400 on-hand to cover the expense. For others, however, it reflected a choice to borrow while preserving cash in their bank account.
Comparing results in the SHED to those from the Survey of Consumer Finances (SCF) provides evidence that payment preferences for some and a lack of cash on-hand for others contributed to this result. Neil Bhutta and Lisa Dettling observed in the 2016 SCF that 24 percent of households had less than $400 in liquid assets after accounting for funds earmarked for monthly expenses.1 This is a substantial share of households that lacked $400 of cash. Yet, it is fewer people than reported in the SHED that they would not use cash or its equivalent to cover a $400 emergency expense.2 Hence, based on these two surveys it appears that some people who had at least $400 in cash would still have chosen to borrow for an emergency of this size.
This observation is consistent with the "credit card debt puzzle," first identified by David Gross and Nicholas Souleles.3 They found that some households hold both high-interest credit card debt and low-return liquid savings that could be used to pay down those debts.
Nevertheless, borrowing for a small emergency, even if done to preserve liquid savings, can be an indication of financial challenges. For example, Olga Gorbachev and María José Luengo-Prado found that individuals who were less confident about their ability to access credit in the future were more likely to use their current credit and to keep some savings.4 Consequently, survey respondents who had $400 of cash but still chose to borrow may have had more uncertainty about their financial situation. Indeed, those who said that they could pay a $400 expense, but would do so by borrowing or selling something, were less likely to be doing okay financially than those who would pay the expense fully using cash or its equivalent (figure A). Eight percent of people who would use cash or its equivalent said that they were just getting by or struggling financially. By comparison, a higher 43 percent who would pay the expense by borrowing or selling something exhibited this level of overall financial stress.
A separate approach to understand the effect of small emergencies is to consider how a $400 emergency affects people's ability to cover their current month's bills. Twenty-eight percent of adults indicated that they either could not pay all of their current bills in full or would no longer have been able to do so if faced with this type of modest emergency, with 2 in 10 deferring at least one non-credit card bill.5 This is similar to the 24 percent of households that Bhutta and Dettling observed had less than $400 in liquid assets after their monthly expenses in the SCF. Of those who were unable to pay their non-credit card bills in full during the month of the survey, or would not have been able to do so if faced with a $400 expense, two-thirds said they were struggling financially or were just getting by overall.
1. Neil Bhutta and Lisa Dettling, "Money in the Bank? Assessing Families' Liquid Savings Using the Survey of Consumer Finances," FEDS Notes (Washington: Board of Governors, November 19, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/assessing-families-liquid-savings-using-the-survey-of-consumer-finances-20181119.htm. Return to text
2. Results from the SHED and SCF are not strictly comparable, however, due to differences in the sample design. In particular, the SCF considered adult children living at home with their parents as part of the same "consumer unit" as their parents, whereas the SHED treated these adult children independently. Return to text
3. David Gross and Nicholas Souleles, "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," Quarterly Journal of Economics117, no. 1 (February 2002): 149–85. Return to text
4. Olga Gorbachev and María José Luengo-Prado, "The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy," Review of Economics and Statistics 101, no. 2 (May 2019): 294–309. Return to text
5. The share deferring at least one non-credit card bill excludes those who said that they could not pay all of their bills in full but did not specify the type of bill they were unable to pay. Including individuals who did not specify the type of bill, 24 percent would defer a non-credit card bill if faced with a $400 expense. Return to textReturn to text
Out-of-pocket spending for health care is a common unexpected expense that can be a substantial hardship for those without a financial cushion. As with the small financial setbacks discussed above, many adults were not financially prepared for health-related costs at the time of the survey in 2019. During 2019, more than one-fifth of adults had major, unexpected medical bills to pay, with the median expense between $1,000 and $1,999. Overall, 18 percent of adults had unpaid debt from their own medical care or that of a family member.
In addition to the financial strain of additional debt, 25 percent of adults went without some form of medical care due to an inability to pay, slightly up from 24 percent in 2018 but well below the 32 percent reported in 2013. Dental care was the most frequently skipped treatment (18 percent), followed by visiting a doctor (14 percent) and taking prescription medicines (9 percent) (figure 17). Going without medical care was more likely among adults who self-reported that they were in poor health. In 2019, 43 percent of adults in poor health went without medical care versus 20 percent of adults in good health.23
There was a strong relationship between family income and individuals' likelihood of receiving medical care in 2019. Among those with family income less than $40,000, 38 percent went without some medical treatment in 2019, slightly up from 36 percent in 2018. Higher income households were less likely to skip medical care due to cost. In 2019, 23 percent of those with incomes between $40,000 and $100,000 and 9 percent of those making over $100,000 went without care. Moreover, as family income rises, the likelihood a person reported being in good health increases substantially. Among those in families with income less than $40,000, 75 percent reported being in good health, compared to 93 percent for those in families with income greater than $100,000.24
Health insurance is one way that people can pay for routine medical expenses and hedge against the financial burden of large, unexpected expenses. In 2019, 91 percent of adults had health insurance. This included 57 percent of adults who had health insurance through an employer or labor union and 32 percent who had insurance through Medicare or Medicaid (some of whom had multiple forms of insurance). Four percent of people purchased health insurance through one of the health insurance exchanges. Those with health insurance were less likely to forgo medical treatment due to an inability to pay. Among the uninsured, 47 percent went without medical treatment due to an inability to pay, versus 22 percent among the insured.25
22. A similar question has been asked since 2016, although a change in the question wording between 2017 and 2018 means that the results for 2016 and 2017 are not comparable to results in more recent years. Return to text
23. Self-reported health was missing for 11 percent of the sample in 2019. Return to text
24. This relationship also holds if focusing only on adults of different income levels within the same age range. Return to text
25. Since the survey asked respondents about their current health insurance status, but also asked about whether they missed medical treatments in the previous year, it is possible that some respondents who had health insurance at the time of the survey were uninsured at the point at which they were unable to afford treatment. Return to text