Nearly half of Americans would have trouble finding $400 to pay for an emergency.

[Rob L 3,811]

• The Secret Shame of Middle-Class Americans

  Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them

• NEAL GABLER
• MAY 2016 ISSUE
• BUSINESS

Since 2013, the federal reserve board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?

Well, I knew. I knew because I am in that 47 percent.

Americans weigh in on financial shame
Read more

I know what it is like to have to juggle creditors to make it through a week. I know what it is like to have to swallow my pride and constantly dun people to pay me so that I can pay others. I know what it is like to have liens slapped on me and to have my bank account levied by creditors. I know what it is like to be down to my last $5—literally—while I wait for a paycheck to arrive, and I know what it is like to subsist for days on a diet of eggs. I know what it is like to dread going to the mailbox, because there will always be new bills to pay but seldom a check with which to pay them. I know what it is like to have to tell my daughter that I didn’t know if I would be able to pay for her wedding; it all depended on whether something good happened. And I know what it is like to have to borrow money from my adult daughters because my wife and I ran out of heating oil.

You wouldn’t know any of that to look at me. I like to think I appear reasonably prosperous. Nor would you know it to look at my résumé. I have had a passably good career as a writer—five books, hundreds of articles published, a number of awards and fellowships, and a small (very small) but respectable reputation. You wouldn’t even know it to look at my tax return. I am nowhere near rich, but I have typically made a solid middle- or even, at times, upper-middle-class income, which is about all a writer can expect, even a writer who also teaches and lectures and writes television scripts, as I do. And you certainly wouldn’t know it to talk to me, because the last thing I would ever do—until now—is admit to financial insecurity or, as I think of it, “financial impotence,” because it has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it and pretend everything is going swimmingly. In truth, it may be more embarrassing than sexual impotence. “You are more likely to hear from your buddy that he is on Viagra than that he has credit-card problems,” says Brad Klontz, a financial psychologist who teaches at Creighton University in Omaha, Nebraska, and ministers to individuals with financial issues. “Much more likely.” America is a country, as Donald Trump has reminded us, of winners and losers, alphas and weaklings. To struggle financially is a source of shame, a daily humiliation—even a form of social suicide. Silence is the only protection.

I know what it’s like to have to borrow money from my daughters because my wife and I ran out of heating oil.

So I never spoke about my financial travails, not even with my closest friends—that is, until I came to the realization that what was happening to me was also happening to millions of other Americans, and not just the poorest among us, who, by definition, struggle to make ends meet. It was, according to that Fed survey and other surveys, happening to middle-class professionals and even to those in the upper class. It was happening to the soon-to-retire as well as the soon-to-begin. It was happening to college grads as well as high-school dropouts. It was happening all across the country, including places where you might least expect to see such problems. I knew that I wouldn’t have $400 in an emergency. What I hadn’t known, couldn’t have conceived, was that so many other Americans wouldn’t have the money available to them, either. My friend and local butcher, Brian, who is one of the only men I know who talks openly about his financial struggles, once told me, “If anyone says he’s sailing through, he’s lying.” That might not be entirely true, but then again, it might not be too far off.

Hugh Kretschmer

Part of the reason I hadn’t known is that until fairly recently, economists also didn’t know, or, at the very least, didn’t discuss it. They had unemployment statistics and income differentials and data on net worth, but none of these captured what was happening in households trying to make a go of it week to week, paycheck to paycheck, expense to expense. David Johnson, an economist who studies income and wealth inequality at the University of Michigan, says, “People studied savings and debt. But this concept that people aren’t making ends meet or the idea that if there was a shock, they wouldn’t have the money to pay, that’s definitely a new area of research”—one that’s taken off since the Great Recession. According to Johnson, economists have long theorized that people smooth their consumption over their lifetime, offsetting bad years with good ones—borrowing in the bad, saving in the good. But recent research indicates that when people get some money—a bonus, a tax refund, a small inheritance—they are, in fact, more likely to spend it than to save it. “It could be,” Johnson says, “that people don’t have the money” to save. Many of us, it turns out, are living in a more or less continual state of financial peril. So if you really want to know why there is such deep economic discontent in America today, even when many indicators say the country is heading in the right direction, ask a member of that 47 percent. Ask me.

Financial impotence goes by other names: financial fragility, financial insecurity, financial distress. But whatever you call it, the evidence strongly indicates that either a sizable minority or a slim majority of Americans are on thin ice financially. How thin? A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings to replace a month’s worth of lost income, and that of the 56 percent of people who said they’d worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses. A similar study conducted by Annamaria Lusardi of George Washington University, Peter Tufano of Oxford, and Daniel Schneider, then of Princeton, asked individuals whether they could “come up with” $2,000 within 30 days for an unanticipated expense. They found that slightly more than one-quarter could not, and another 19 percent could do so only if they pawned possessions or took out payday loans. The conclusion: Nearly half of American adults are “financially fragile” and “living very close to the financial edge.” Yet another analysis, this one led by Jacob Hacker of Yale, measured the number of households that had lost a quarter or more of their “available income” in a given year—income minus medical expenses and interest on debt—and found that in each year from 2001 to 2012, at least one in five had suffered such a loss and couldn’t compensate by digging into savings.

MORE ON MONEY STORIESNOTES

• Readers share stories of financial woe
• Experts sound off on Gabler's essay

You could think of this as a liquidity problem: Maybe people just don’t have enough ready cash in their checking or savings accounts to meet an unexpected expense. In that case, you might reckon you’d find greater stability by looking at net worth—the sum of people’s assets, including their retirement accounts and their home equity. That is precisely what Edward Wolff, an economist at New York University and the author of a forthcoming book on the history of wealth in America, did. Here’s what he found: There isn’t much net worth to draw on. Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.

Wolff also examined the number of months that a family headed by someone of “prime working age,” between 24 and 55 years old, could continue to self-fund its current consumption, presuming the liquidation of all financial assets except home equity, if the family were to lose its income—a different way of looking at the emergency question. He found that in 2013, prime-working-age families in the bottom two income quintiles had no net worth at all and thus nothing to spend. A family in the middle quintile, with an average income of roughly $50,000, could continue its spending for … six days. Even in the second-highest quintile, a family could maintain its normal consumption for only 5.3 months. Granted, those numbers do not include home equity. But, as Wolff says, “it’s much harder now to get a second mortgage or a home-equity loan or to refinance.” So remove that home equity, which in any case plummeted during the Great Recession, and a lot of people are basically wiped out. “Families have been using their savings to finance their consumption,” Wolff notes. In his assessment, the typical American family is in “desperate straits.”

Hugh Kretschmer

Certain groups—African Americans, Hispanics, lower-income people—have fewer financial resources than others. But just so the point isn’t lost: Financial impotence is an equal-opportunity malady, striking across every demographic divide. The Bankrate survey reported that nearly half of college graduates would not cover that car repair or emergency-room visit through savings, and the study by Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month. A documentary drawing on Lusardi’s work featured interviews with people on the street in Washington, D.C., asking whether they could come up with $2,000. Lusardi, who was quick to point out that a small number of passerby interviews should not be mistaken for social science, was nonetheless struck by the disjuncture between the appearance of the interviewees and their answers. “You look at these people and they are young professionals,” Lusardi said. “You expect that people would say, ‘Of course I would come up with it.’ ” But many of them couldn’t.

In the 1950s and ’60s, American economic growth democratized prosperity. In the 2010s, we have managed to democratize financial insecurity.

If you ask economists to explain this state of affairs, they are likely to finger credit-card debt as a main culprit. Long before the Great Recession, many say, Americans got themselves into credit trouble. According to an analysis of Federal Reserve and TransUnion data by the personal-finance site ValuePenguin, credit-card debt stood at about $5,700 per household in 2015. Of course, this figure factors in all the households with a balance of zero. About 38 percent of households carried some debt, according to the analysis, and among those, the average was more than $15,000. In recent years, while the number of people holding credit-card debt has been decreasing, the average debt for those households carrying a balance has been on the rise.

Part of the reason credit began to surge in the ’80s and ’90s is that it was available in a way it had never been available to previous generations. William R. Emmons, an assistant vice president and economist for the Federal Reserve Bank of St. Louis, traces the surge to a 1978 Supreme Court decision, Marquette National Bank of Minneapolis v. First of Omaha Service Corp. The Court ruled that state usury laws, which put limits on credit-card interest, did not apply to nationally chartered banks doing business in those states. That effectively let big national banks issue credit cards everywhere at whatever interest rates they wanted to charge, and it gave the banks a huge incentive to target vulnerable consumers just the way, Emmons believes, vulnerable homeowners were targeted by subprime-mortgage lenders years later. By the mid-’80s, credit debt in America was already soaring. What followed was the so-called Great Moderation, a generation-long period during which recessions were rare and mild, and the risks of carrying all that debt seemed low.

Financial impotence has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it.

Both developments affected savings. With the rise of credit, in particular, many Americans didn’t feel as much need to save. And put simply, when debt goes up, savings go down. As Bruce McClary, the vice president of communications for the National Foundation for Credit Counseling, says, “During the initial phase of the Great Recession, there was a spike in credit use because people were using credit in place of emergency savings. They were using credit as a life raft.” Not that Americans—or at least those born after World War II—had ever been especially thrifty. The personal savings rate peaked at 13.3 percent in 1971 before falling to 2.6 percent in 2005. As of last year, the figure stood at 5.1 percent, and according to McClary, nearly 30 percent of American adults don’t save any of their income for retirement. When you combine high debt with low savings, what you get is a large swath of the population that can’t afford a financial emergency.

Edited April 21, 2016 by Rob L

[lostinblue 1,989]

Most cases it is a life style choice.. A program was on TV once about bankruptcy .. Judge wanted them to list every expense they had . Every dollar spent .. write it down .. .. Folks were saying we cannot cut anymore judge .. He looked at the list . Some folks were eating out 6 times a week. ... Told them all to brown bag it. at work . .

[Boiler 43,791]

I agree with the life style choice.

Does not seem to allow for the fact that many live on credit not cash.

[smilesammich 10,727]

I agree with the life style choice.

Does not seem to allow for the fact that many live on credit not cash.

the 'middle class' has had the wealth sucked out of it. why folks decide to blame the working class for economic policy that benefits only the creme de la creme is beyond me.

these numbers don't make me think "workers make poor lifestyle choices"

The CEOs of the largest companies in the U.S. earn three times more than they did 20 years ago and at least 10 times more than 30 years ago, according to a new report.

In between 1978 and 2014, inflation-adjusted CEO pay increased by almost 1,000%, according to a report released on Sunday by the Economic Policy Institute. Meanwhile, typical workers in the U.S. saw a pay raise of just 11% during that same period.

With these increases in mind, it should come as no surprise that the ratio between average American CEO pay and worker pay is now 303-to-1. This ratio is lower than its peak in 2000, when it was 376-to-1, but it’s in excess of the 1965 ratio of 20-to 1.

Average realized pay for CEOs at the top 350 firms as measured by revenue was up 3.9% between 2013 and 2014, and up by 54.3% since the recovery began in 2009. Meanwhile, most other workers have faced stagnant wages.

http://fortune.com/2015/06/22/ceo-vs-worker-pay/

[lostinblue 1,989]

the 'middle class' has had the wealth sucked out of it. why folks decide to blame the working class for economic policy that benefits only the creme de la creme is beyond me.

these numbers don't make me think "workers make poor lifestyle choices"

http://fortune.com/2015/06/22/ceo-vs-worker-pay/

[The Nature Boy 7,659]

the 'middle class' has had the wealth sucked out of it. why folks decide to blame the working class for economic policy that benefits only the creme de la creme is beyond me.

these numbers don't make me think "workers make poor lifestyle choices"

http://fortune.com/2015/06/22/ceo-vs-worker-pay/

Those of you who don't think a lot of people in trouble make poor decisions don't pull credit all day. It's mind blowing

[smilesammich 10,727]

Those of you who don't think a lot of people in trouble make poor decisions don't pull credit all day. It's mind blowing

of course the poor make poor economic decisions, that has nothing to do with the manageable reasons our once thriving middle class is now living paycheck to paycheck and on credit.

[The Nature Boy 7,659]

of course the poor make poor economic decisions, that has nothing to do with the manageable reasons our once thriving middle class is now living paycheck to paycheck and on credit.

It ain't the poor. It cuts across all economic classes.

[Boiler 43,791]

of course the poor make poor economic decisions, that has nothing to do with the manageable reasons our once thriving middle class is now living paycheck to paycheck and on credit.

So vote Trump

[smilesammich 10,727]

the 'middle class' has had the wealth sucked out of it. why folks decide to blame the working class for economic policy that benefits only the creme de la creme is beyond me.

these numbers don't make me think "workers make poor lifestyle choices"

http://fortune.com/2015/06/22/ceo-vs-worker-pay/

how is this relevant to the op?

[ExPatty 502]

Read the whole thing.

Good article, but it spends too long drawing the wrong conclusions from the figures it supplies. There are staggering numbers, like a drop in median household worth over ten years from $83k to $50k or whatever it was.

I can't pretend that things are not flat or getting worse for the middle and lower class because they are.

But, the only way to interpret this guy's life is one of stupidity--stupidity he readily admits (e.g. emptying a 401k for a wedding--that's downright pathetic). In fact, he cites 65% of adults financially illiterate. Yet, it takes very little actual work to understand basic finances. If 25% of people making $100-150k cannot even come up with $2k they are the ones to blame. It's like lotto winners who end up bankrupt: simply put money doesn't fix stupid.

Many approach money the same way they do their weight: impulsiveness rules supreme and money/weight is a problem for tomorrow. That's why most half (?) of adults have no meaningful retirement, for example.

It is not a lack of income, it is a lack of financial discipline. Unless you live in the gutter odds are you spend money from time to time on basic entertainment, alcohol, etc. These all add up quickly to the mythical $400.

If you suck with money and make more money you will still suck with it.

I found the correlation between easy credit and the lack of savings/financial security to be very compelling. Studies show that those who use credit cards spend substantially more than if they don't (even if they have the money). In my own life I've found household spending drops precipitously when all expenditures are made with debit cards instead of credit because there is a stronger sense of it being real money.

I think credit to most is like cheap junk food to most. It's a tough influence to fight. I should have way more saved than I do given my income. But, I like to buy @*#&. That is nobody's fault but mine.

[smilesammich 10,727]

So vote Trump

no.

[Janelle2002 3,865]

the 'middle class' has had the wealth sucked out of it. why folks decide to blame the working class for economic policy that benefits only the creme de la creme is beyond me.

these numbers don't make me think "workers make poor lifestyle choices"

http://fortune.com/2015/06/22/ceo-vs-worker-pay/

Your picture is so stupid. Yet again you've turned another thread into black people. What a disgrace

[Boiler 43,791]

no.

So what are you complaining about, be part of the problem or part of the solution.

Your picture is so stupid. Yet again you've turned another thread into black people. What a disgrace

Picture may be stupid, the words are more important.

[smilesammich 10,727]

I think credit to most is like cheap junk food to most.

the reason poor folks are stuck purchasing cheap junk food is the exact same reason poor folks get in over their heads with credit. eating healthy is a luxury. same as paying for everything with cash.