Financial Fragility

8 07 2011

When we first started blogging, I thought that I would write a fair amount about personal finances and financial independence. I haven’t done that as much as I expected, and this post isn’t much of an exception. It is, however, directly related to financial independence as it underscores the inexplicable lack of financial planning that goes on in our country.

Like most people, I have friends and acquaintances who make decent money yet live paycheck-to-paycheck. However, until recently I didn’t know as much about the overall financial fragility of households in the United States. The National Bureau of Economic Research recently published a paper which looked at the ability of households to come up with $2,000 in 30 days. (Borrowing money from family, taking a loan from a bank or pawning items at a shop would all count toward coming up with the $2k.)  Their conclusion:

Nearly half of Americans definitely or probably could not come up with $2,000 in 30 days.

Annamaria Lusardi of The George Washington School of Business is a researcher who focuses on financial literacy. She co-authored the paper referenced above and has reached similarly depressing conclusions in other of her research.

  • “The majority of Americans do not plan for predictable events, such as retirement or children’s college education.”

From FINRA:

  • “Nearly one quarter of individuals with checking accounts reported overdrawing those accounts on occasion.”
  • More than half of individuals report not paying their credit card bills in full and being charged interest.

In case you were curious, if you’re an aspiring mini- or early- retiree, these are things to avoid.

posted by yair

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10 responses

9 07 2011
test

That’s ridiculous; what do they base that on?

10 07 2011
Ayo and Yair

Depends which one you’re talking about, but as Talia wrote below, the $2k stat was based on polls.

10 07 2011
Talia

Having just googled that study, it seems that this was based on a poll of whether people think they could come up with the money, so its their self-assessment. In reality, many of them probably could if they really have to, but the fact that over half of people still feel that they couldn’t come up with an extra $2000 in 30 days is pretty astounding.

10 07 2011
Ayo and Yair

Yup, although what makes you think that people were misjudging their ability to come up with the $2k?

11 07 2011
Talia

It seems to me people wouldn’t necessarily think through what they would do in a desperate situation, until they were actually in that desperate situation. People aren’t going to think through all the options answering a poll question in one minute but with 30 days they would figure out all the possibilities…

12 07 2011
ayo

Hmm, that makes sense to me.

10 07 2011
Talia

* had to

10 07 2011
libertatemamo

It’s a pretty shocking statistic. We’ve spent alot of time on finances (it’s hubby’s big passion) so unfortunately we’ve seen our share of shocking studies. Hubby just read a link recently that 83% of retirees and 90% of workers have less than $250K in savings -> that may not seem too bad, bit $250K works out to only $10K/yr in retirement income if you follow the 4% SWR model and want your money to last. All hope is on social secutiry…
I wish finance was a required topic in schools.
Nina

10 07 2011
Ayo and Yair

My impression is that college is where people discover credit cards and minimum payments, so I’m completely with you on finance being part of a school’s core curriculum.

12 07 2011
frugalveganmom

Isn’t it incredible how otherwise smart people can be so removed from their financial situations – just charge whatever you want on credit, buy a house bigger than you need, make the minimum payments, let the interest pile up, and basically be trapped for life.

Financial literacy should definitely be required in H.S. and college, ha I bet the credit card companies would lobby against that though! I would love to have a career counseling people in this area….someday….

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