How ‘financially fragile’ are we?
On May 23, the Wall Street Journal published an article entitled ‘Nearly Half of Americans Are ‘Financially Fragile’ . This draws on research by Annamaria Lusardi, Daniel J. Schneider and Peter Tufano, where people were asked the question ‘If you were to face $2,000 of unexpected expense in the same month could you raise the money?’ Over half the participants answered ‘no’.
Scary stuff! This is ‘financial fragility’; when people cannot raise enough money to pay for repairing their car if it breaks down unexpectedly, pay their legal/medical bills or buy new domestic appliances if they stop working.
And if you are thinking that there is wide spread poverty in the US you may be right. But let me tell you that the study shows that a sizeable proportion of middle class people are also ‘financially fragile’ It is even more scary that that – a quarter of the people who can raise the money reported that they will do so by using extreme measures like pawning possessions, taking payday loans or selling their home.
The UK, according to this study, has similar levels of ‘financial fragility’ as the US and over 50% of us have no provisions, or the ability, to cope with unexpected expenses. People found to have the highest coping capacity (the lowest ‘financial fragility’) were in Canada, the Netherlands and Italy.
This made me think about how ‘financially fragile’, or not, I am. I reckon that more ordinary emergencies in the UK can be covered by about £1,200. Any emergency larger than that is likely to be covered by insurance. The question than is could I raise £1,200 within 30 days? Today my answer is ‘yes’ – I have this amount in my emergency fund. Eighteen months ago the answer would have been ‘no’ and I would have had to use credit card. Today I am not ‘financially fragile’.
How about you? Could you raise £1,200 within 30 days? If the answer is ‘no’ it is time to get serious about building an emergency fund. Build it fast; build it even if you have
debt negative wealth. I keep my emergency fund separate from my savings – savings and investments should not be touched; the emergency funds is ‘what it says on the tin’ and should be used in true emergencies.