Covering Even Small Financial 'Surprises' Out of Reach for Many Workers

They say it’s a strong economy. They remind us that the unemployment rate is the lowest it’s been in decades. So why do so many households say they’d be up the creek if hit with a surprise bill of just $400?

According to a brief from the Center for Retirement Research at Boston College, debt could be the reason. In fact, 41% of households say that if confronted by an unexpected expense of $400, they’d have a tough time covering it—despite the fact that some of them may actually have that much set aside in checking or savings accounts.

That money is likely already earmarked to pay another bill, says the report, and it doesn’t matter whether the household is middle income or higher income. Researchers checked that aspect of the problem and found that 17% of households with more than $100,000 in income said they’d have problems covering that $400 bill.

While it’s true that according to Survey of Consumer Finances data only 1% of those higher-income households have less than $400 available for a surprise bill—about 20% of households are in that position, and they’re mostly among the lower-income crowd—that doesn’t mean that what money they have isn’t already committed elsewhere, to, say, an unpaid credit card bill.

Says the report, “Even though households in the second group [those that would have less than $400 in cash once they paid off their credit cards (17%) technically have enough cash on hand to cover a $400 expense, they may mentally allocate the amounts in their checking/savings accounts to paying off credit card debt, where rates are high on unpaid balances.”

It’s not a question of financial literacy, either, say researchers, since they actually tested the level of financial literacy among the three groups—those who say they can’t pay that $400 bill, those who really can’t pay it and those who can—and found very little difference among them.

There was a difference, however, in levels of education, with those on the low end of the education scale (lacking a college degree) also on the low end of the financial scale.

There are three basic groups who are unable to cover that unexpected $400 expense: the group with low income, the group with debt—credit card debt, student loans and installment loans—and the group with mortgages. But debt is the overriding factor, and crosses income lines.