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.

6 thoughts on “How ‘financially fragile’ are we?”

  1. This is interesting Maria. I have calculated that within 30 days I could raise the £1200 you talk about from a combination of our own emergency funds plus cutting back without resorting to loans or credit cards. This is good, so no, we are not financially fragile but I could do with boosting our emergency fund. The interesting part is that I still “feel” financially fragile, so I am obviously looking for much greater financial stability.

    1. This is very good news, Anne. I hope that the feeling of ‘financial fragility’ will go away for a bit as well – because you are not financially frigile. As to feeling secure, I am not sure what the situation is and whether you have any other ‘negative wealth’ than the mortgage. For my part, I have decided that I am going to leave the emergency fund at just about non-fragile level and focus on the negative wealth. This way it will be gone relatively soon. Only after that I’ll build a bit more reserve – again need to think about this one and I can feel a post coming. And mortgage, here we come….What I am trying to say is that I have come to think that th name of the game is ‘focus’ – in money matters as well as any other.

  2. So, I have been chewing over this feeling of financial insecurity and where it is coming from and more importantly what the solution to it is….. and last night I had an aha moment. As a family, we have good financial practises in place, we have an emergency fund, we are paying off our mortgage, we save (albeit a very small amt at the moment), we have work pensions. So what is the issue – the issue is that all this good practise relies on one salary. Should this link in the chain break, the house of cards comes tumbling down (sorry, mixing my metaphors here but you get the gist). I am very risk averse (probably as a result of past experiences – going through redundancy once myself, giving up work to become a carer, oh going through three redundancies) and to my mind this is too much pressure on this one point in the chain.

    The answer, we need to spread the risk and ensure additional sources of income, preferably as passive as possible, as there is only so many hours in the day. Next problem to tackle, establishing these income sources. Woohoo I feel as if I have just taken a massive step forward :-)

    1. So you have, Anne. And you are right – it is not only how much your income is but also what is the structure of your income. I also have set up a goal (intention) to generate about £1600 passive income. Still puzzling over how but the intention is half the way there, I believe. Well done!

  3. Forgot to mention that dealing with insecurity by eliminating the cause of it is only one of the two approaches. It may be that you will need to examine the insecurity on its own and deal with it – this kind of thing stops us doing things and even can stop us developing income streams. I was shocked to see my note in a book saying that what stops me from learning about money and how to make it is the fear that I’ll lose it all. Tim Ferris recomends sitting down and writing down your worst fears by which in fact you confront them. I did it – and it works. Worth a try anyway.

  4. Well done Anne for taking the step! Baby steps will help you get there. I have also come to the realization that we need to find additional income sources. A downturn in the building trade over the past few years has played havoc with our finances, but things are on the up again in that department, although the rates for working are lower than 5 years ago, which is a bit depressing. It has made me focus on finding new sources though, so now I just need to put more of the ideas into practice. Easier said than done! I am working on it.

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