Can you handle an immediate $400 emergency expense? Are you able to come up with $2,000 in 30 days? If your answer is no, you are probably financially fragile. The National Endowment for Financial Education (NEFE) reports that nearly two out of five working-age Americans fall into this category. This means an unexpected medical bill, parking ticket or car repair can trigger a chain of financial losses.
“The majority of people who are financially fragile are in the lower income bracket,” says Billy Hensley, president and chief executive officer of NEFE. “But actually, one in five Americans who we consider high income, those that make $75,000 to $100,000 a year, are also financially fragile. It’s high debt. It’s lack of assets. It’s low financial literacy and the lack of understanding of how financial decision making works. When you put all of those together, that’s really what creates fragility for the average American home.”
If you live on the financial edge, Hensley says there are three things you can do to improve your situation.
Shore up savings
Studies show that most Americans are living paycheck to paycheck. That’s why many us have a tough time putting money away for emergencies. The NEFE study found that when families are faced with an expense they can’t afford, they might choose to work more, sell something, cash in assets or use alternative financial services such as payday lenders. Hensley says when it comes to savings, it’s important to start small.
“If it’s just carving out as little as $500 for a deductible for a car repair or car accident, that can go a long way with helping people feel more secure,” he says.
Hensley says consumers also need to understand the complexity of savings. It’s not just about saving money for a rainy day. He says it’s also about using different savings vehicles for different aspects of your life. Are you getting the most out of your 401(k) employer match at work? Do you understand what an IRA (Individual Retirement Account) is and how you can put money away for your future? NEFE says those who are financially fragile are almost 18 percent less likely to plan for retirement.
Improve financial literacy
Hensley says saving and financial literacy go hand in hand. Make an effort to increase your knowledge of personal finance. Place an importance of saving and not spending as much money. Once you put what you’ve learned into action, that will free up the liquidity to help you deal with unexpected events. NEFE data shows that financial literacy significantly lowers the likelihood of individuals being financially fragile.
Hensley stresses that high debt can impede consumers throughout their life. NEFE says almost 50 percent of those with education debt have difficulty dealing with a $400 emergency expense. People on the financial edge are also more likely to be denied credit or receive less credit than they ask for. He says it’s also important to understand the difference between good debt and bad debt. Taking out a mortgage to buy a home is typically considered good debt. Bad debt is when you buy things that quickly lose their value or don’t generate long-term income. He says you should work at keeping your high-cost debt down and your good debt up. It’s not about paying the minimum payment. It’s about how you manage your day to day finances. It’s about making better decisions with how you spend your money.