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DENVER—Research funded by the National
Endowment for Financial Education® (NEFE®), and conducted by the Global
Financial Literacy Excellence Center at the George Washington University,
identifies a widespread problem affecting millions of Americans. The recent study finds one in three Americans
are financially fragile, meaning they are unable to cope with emergency
expenses in a short timeframe.
Using survey data and focus group discussion
findings, researchers assessed responses focused on financial
preparedness—specifically respondents’ confidence that they could come up with
$2,000 within a month’s time if needed for an emergency. Individuals answering
that they certainly could not or probably not come up with that amount of money
in that timeframe are considered financially fragile. The analysis found that
one in three (36 percent) respondents in the 2015 National Financial Capability
Study (NFCS) fall within this vulnerable group.
“It’s inevitable that a person will experience
a financial setback or an income disruption during their lifetime,” says Billy
Hensley, Ph.D., senior director of education at NEFE. “If you’re getting money
back from Uncle Sam this tax season, consider investing this windfall toward
starting or growing an emergency savings fund.”
Financially fragile Americans could not cover
the cost of a midsize shock, such as a medical bill, car or house repair within
a reasonable amount of time, in the case of this study one month. This number
has dropped since 2009 during the Great Recession, when nearly 50 percent of
working-age adults were considered financially fragile. Still, the prevalence
of unsteady personal finances is concerning.
What causes financial
fragility? Researchers
investigated the causes of financial fragility and found three main factors:
high debt, lack of assets, and low financial literacy.
“Financial fragility does not mean simply lack
of precautionary savings,” says Annamaria Lusardi, Ph.D., academic director of
GFLEC. “Both sides of households’ balance sheet matter; heavy indebtedness can
also make individuals financially fragile.”
Higher income does not
always protect against financial fragility. Not surprisingly, the majority of financially
fragile people are in the low-income bracket. Yet almost 30 percent of
middle-income households (annual income in the $50–75k range) and 20 percent of
high-income households (annual income $75–100k) also are considered financially
fragile.
“The contrast of a $2,000 emergency expense in
comparison to higher-income levels is striking,” says Hensley. “Among
lower-income individuals and families, most rely, due to the limits of
financial liquidity, on borrowing from their network of friends and family or
working multiple jobs. Unfortunately, financially fragile households are less
likely to have a precautionary safety net.”
Financial fragility
and retirement. Financial fragility is
shown to make people vulnerable not only in the short term, but also in the
long term, as financially fragile individuals are less likely to plan for their
retirement.
Fragility impacts all
age groups. Financial
fragility does not seem to decrease with age. People of all age groups are
financially fragile at comparable levels, despite the expectation that people
earn more money as they get older.
Education and gender
decrease fragility risk. The
higher the education level, the lower the probability of being financially
fragile. Also at risk are women, a substantially higher proportion of
working-age women are financially fragile relative to men.
“Financial fragility is a multifaceted problem
facing a wide representation of the American population,” says Hensley. “We
urge everyone to consider the unique factors in their life and prioritize their
finances accordingly to work toward long-term financial goals.”
“Initiatives such as incentivizing short-term
savings and requiring financial education in school and the workplace can be
important steps toward increasing financial resilience,” Lusardi adds.
For more on the financial fragility
research, click here.
https://insurancenewsnet.com/oarticle/1-in-3-americans-is-financially-fragile
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