Are Families Prepared for Financial Emergencies?

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Abstract

Data from the 2007 Survey of Consumer Finances show a disturbing reality. Even prior to the current recession, many families did not have enough assets to see them through a modest spell of unemployment or another financial emergency. In 2007, nearly one in three U.S. families were liquid asset poor. Low-income, young, and nonemployed families are more vulnerable to economic emergencies. For example, two-thirds (68 percent) of bottom income quintile families and 47 percent of second income quintile families are liquid asset poor, while such shortfalls affect only 1 percent of top income quintile families.

Introduction

The current economic downturn, characterized by high unemployment and limited access to credit, highlights the need for families to have enough assets to weather financial emergencies. But data from the 2007 Survey of Consumer Finances show a disturbing reality. Even prior to the current recession, many families did not have enough assets to see them through a modest spell of unemployment or another financial emergency, such as unexpected medical expenses.

Traditional financial advice has been that families should have enough savings to cover at least three months of expenses. We examine a less-stringent measure of financial security—asset poverty. A family is categorized as asset poor if it does not have enough resources, measured separately as liquid assets and net worth, to live at the federal poverty level for three months. This translates into about $5,300 for a family of four in 2007.

In 2007, nearly one in three U.S. families (31 percent) were liquid asset poor (table 1). When net worth is considered, asset-poverty rates fall by half (to 16 percent).

Thus, many families hold their wealth in the form of nonfinancial assets, such as a home or a business. Not surprisingly, rates of asset poverty vary substantially across the income distribution. While 68 percent of bottom income quintile families and 47 percent of second income quintile families are liquid-asset poor, such shortfalls affect only 1 percent of top income quintile families.¹ Asimilar pattern holds for net worth asset poverty.

Asset-poverty rates are lower for employed families. While 27 percent of employed families are liquid asset poor, the rate reaches 40 percent among nonemployed families. The comparable net worth asset-poverty rates are 14 percent and 21 percent, respectively. Among families in the two lowest income quintiles, however, asset-poverty rates are higher among employed than among nonemployed families. Many nonemployed retirees, who have little income but high wealth levels, are in these lower income quintiles.²

Younger families are more vulnerable to economic emergencies. In 2007, 54 percent of families whose head was under age 30 were liquid asset poor, compared with 30 percent whose head was between 40 and 49, and 21 percent whose head was between 50 and 61.The pattern of asset poverty by age follows a life-cycle pattern where assets start low, increase during one's working life, and decline with retirement.

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