According to report, most American households are able to cover unexpected expenses!
Despite the continuous rise in the cost of living, a recent study by the JPMorgan Chase Institute points out that most households are financially prepared to cover unexpected expenses. This finding is based on an analysis of 5.9 million households using anonymized banking data.
The Federal Reserve reports that in 2023, 13% of adults would struggle to pay for a sudden $400 expense. However, the JPMorgan Chase Institute’s research suggests a more optimistic scenario: only 8% of households would be unable to manage such an expense – when considering a combination of cash, disposable income, and short-term credit -, which remained steady between 2022 and 2023.
According to the JPMorgan Chase Institute, 92% of households can cover a $400 “expense shock” through a mix of cash, disposable income, or short-term credit. Specifically, 67% can rely entirely on cash savings, 20% can use a combination of cash and disposable income, 3% can cover the cost with cash, disposable income, and a credit card without incurring interest, and 2% can do so by using cash, disposable income, and a credit card that can be paid off within three months.
Avoid Long-Term Debt
Although many people can rely on credit for short-term financial needs, it’s important to be cautious, as this can lead to long-term debt. Financial experts advise building a cash reserve to avoid relying on credit in emergencies. Building an emergency fund – ideally three to six months’ worth of living expenses – can be challenging, but here are some strategies that can help:
- Apply The Rule Of Thirds To Extra Income: when you receive a raise or bonus, allocate one-third to taxes, one-third for personal enjoyment, and the final third to savings, either by paying off credit card debt or adding to your emergency fund;
- Save Extra Paychecks: many people are paid bi-weekly, which means they receive three paychecks in two months of the year. Experts recommends saving that third paycheck to boost your emergency fund;
- Cash In Unused Gift Cards: people tend to have gift cards they haven’t used. Try selling them on sites like Raise or CardCash to add to your emergency savings. Although you may not get full value, converting unused cards to cash can still help build your financial cushion.