Study: Financial Setbacks are Common and Have Lasting Effects on Households’ Finances


11/2/2015 10:46:00 AM

Pew Charitable Trusts’ first findings in a three-part series reveal financial hardship is not far away for many households, and financial setbacks can cause higher credit card debt.

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Financial setbacks disrupt families at all income levels and, according to new research from Pew Charitable Trusts, even one occurrence can cause households to lose some of their savings and experience increased credit card debt.

The research is the first in a three-part series to explore how financial setbacks and emergency savings are related to families' financial well-being, according to Pew Charitable Trusts.

Pew defines financial setbacks as job loss, injury, illness, death or a major home or vehicle repair that can result in significant pressure, even for high-income households, according to the report “How Do Families Cope with Financial Shocks?”

Financial shocks are both common and damaging to family finances,” Clinton Key, a Pew research officer, told The New York Times in an article about the report. “Everyone knows if you have a car, it's going to break down. But nobody really thinks it's going to happen today.”

Overall, using data from Pew's Survey of American Family Finances, including more than 7,800 households, researchers learned that “the median household does not have enough liquid savings—money held in checking and savings accounts, unused balances on prepaid cards, and cash saved at home—to replace even one month of income.”

After a financial setback, “the median household … had almost $4,000 less in liquid savings, could replace only about half as much income using liquid savings, and was more likely to carry a monthly balance on credit cards than an unaffected household,” according to the research.

Pew also found that 60 percent of households experienced a financial setback in the past year. Forty-seven percent of households that experienced a financial setback also had “serious financial shortfalls in the past 12 months, compared with 16 percent of households that did not.”

More households that experienced financial setbacks are also more likely to owe balances on their credit cards, according to the report. “A third of households without [financial setbacks] have outstanding credit card balances, compared with 45 percent of households that experienced financial setbacks.”

Additional findings in the report include:

  • The median household reported spending $2,000 on the most expensive financial setback they experienced.
  • The expense of a setback varies for households included in the study. Thirty-two percent of households surveyed experienced two or more financial setbacks and among those households, 27 percent reported the most costly event was a loss of income and the same percentage reported it was a car repair.
  • While the median household spent $2,000 as a result of a financial setback, the costs range from $600 to $6,000 or more.
  • Lower-income households spent the equivalent of 31 days of earnings as a result of the most expensive financial setback, which is three-times the impact experienced by a high-income household.

“These findings can help inform how diverse households might need to prepare for financial emergencies and how policies and programs might affect the financial security of households differently,” according to the report.

Pew Charitable Trusts' next report in the series on financial setbacks will focus on resources that households have and how far those resources will go if financial setbacks continue to be so common.

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