The Safety Net Is Frayed For Many Americans

Foster City, Calif., May 25, 2016 — New research by personal finance site WisePiggy shows that more than half of Americans can't afford a financial emergency and would need to rely on some form of debt  –  credit cards, personal loans – or by borrowing from family and friends to weather the crisis.

Even more worrisome is that a full 15 percent say they have zero cash savings on hand for any unexpected expense and one-third (34 percent) have only enough savings to cover expenses for three months or less, according to a national study commissioned by WisePiggy and conducted online by Harris Poll among 2,008 adults ages 18 and older.

This frayed safety net cuts across all generational and gender lines, our analysis shows, from Millennials to Generation X’ers. It also reveals differences between how men and women would handle an immediate cash need of $5,000, a cost recognizable to anyone who has faced unexpected job loss, large emergency home repairs or a major medical crisis.

Here’s more:

• Young and Cash-Strapped. Millennials age 18-34 seem to struggle the most with savings, compared to other age groups. While 15 percent of Americans say they have zero cash savings, it jumps to one in five, or 21 percent, among Millennials.
• Not so Golden Years. Seventeen percent of people 65 years of age or older say they have three months-worth or less of cash savings readily accessible for an emergency. Most experts advise six months or more in cash to cover mortgage/rent, bills and other living expenses.
• Higher Incomes not Immune. Even those relatively well-off are at risk for financial insecurity. Among those with household incomes of $100,000 or more per year, 27 percent – or nearly three in ten – have that three-month cushion or less.
• Gender Gap. The study also finds key differences between men and women. When it comes to tapping into retirement funds in an emergency, men are twice as likely to consider this option as women (14% vs. 7%, respectively).
• Gen X Hit Hard. Nearly half (47 percent) of those between the ages of 35 and 44 say they have three months or less in cash savings, the highest percentage for any age group. Even worse is that 23 percent of 45- to 54-year-olds said they have less than one month’s worth of cash savings, which could mean they are one missed paycheck or a layoff away from a potential financial disaster.

Credit as a critical fallback

While 42 percent say they would use cash savings to pay for a major expense; 51 percent say they would use a credit card, borrow from friends or family or take out a personal loan. Personal loans have exploded onto the scene in recent years, with 13 million consumers now holding a personal loan, according to research by TransUnion. However, it is essential consumers shop around and compare lenders before taking on an unsecured personal loan.

• Millennials seemed more familiar with this as an option, with 24 percent of Millennials saying they would take out a personal loan, the highest of any age group.
• Millennials were also more apt to rely on friends and family than their older counterparts. Thirty-seven percent between 18 and 34 say they would borrow money from friends and family. That percentage dropped to the single digits for those who were 55 and older (5%).

Understanding the cost of debt

Another theme that emerged from the WisePiggy survey was a divided understanding of the cost of taking on debt. Among those who have any debt, 83 percent know the interest rates on any of their debts, but just under half (49 percent) know the interest rate on their credit card(s). More:

• Only two in five (40 percent) know the interest rate on their mortgage
• One third (33 percent) know the interest rate on their auto loan
• Roughly one in five (19 percent) know the interest rate on their student loan
• Younger respondents age 18-34 (35 percent) were less likely than those age 35 or older (55 percent) to know their credit cards’ interest rates.
• While Millennials are less likely to know their credit card rates than other age groups, 40 percent know their student loan interest rates.

Key Takeaways

Americans with low cash reserves risk falling into debt by leaning on credit cards during tough times and may even endanger their retirement years by dipping into retirement funds, which have costly early withdrawal fees. Instead, focus on building up a cushion no matter how modest and keep adding to it.

Here are some tips from WisePiggy’s personal finance experts:

• Start small, but start saving. Put aside cash from each and every paycheck, even if it’s only $5 to start. For those who can’t put aside a larger amount, consider ways to bring in extra income each month that you can dedicate to savings. Think of what skills or assets you have that other people are willing to pay for, such as after-school care for working parents, carpool services, pet-sitting, furniture assembly or light handyman work on weekends. Local social networks like Nextdoor are great places to post and find these sorts of opportunities.
• Use credit wisely. If you must turn to credit in an emergency, know your credit score upfront using a free credit score tool, such as the one offered by WisePiggy and powered by TransUnion. By eliminating mistakes and keeping your credit score as healthy as possible, you’ll qualify for better rates and zero balance transfer options that can save you hundreds, if not thousands.
• Consider other credit options. Some may be better off with a fixed-term personal loan than adding more to high-interest credit scores. But be sure to get aggressive about paying your loans off as quickly as possible and saving what you can in the meantime. Never enter a loan agreement that doesn’t allow for early payoff.
• Family may not be the worst choice. Few adults like to admit they need help, but family can be a good backstop. Experts recommend even with an informal loan, be clear about expectations for repayment. You may even want to offer to pay interest equal to what your family member may have earned in a high-yield savings account, currently around 1.5-2 percent.

Methodology

This survey was conducted online within the United States by Harris Poll on behalf of WisePiggy from March 28-30, 2016, among 2,008 adults (aged 18 and over). This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, and all survey results please contact Diana Dang at [email protected].

About WisePiggy

WisePiggy is a leading site for credit tools and education. A free membership gives you access to a free credit score along with a custom WisePiggy Report Card. This unique and useful tool assesses your score, and offers a custom action plan designed to lead you to a better credit score and bigger savings.