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Financially Fragile Households: Evidence and Implications

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  • Annamaria Lusardi
  • Daniel J. Schneider
  • Peter Tufano
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    Abstract

    This paper examines households’ financial fragility by looking at their capacity to come up with $2,000 in 30 days. Using data from the 2009 TNS Global Economic Crisis survey, we document widespread financial weakness in the United States: Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. If we consider the respondents who report being certain or probably not able to cope with an ordinary financial shock of this size, we find that nearly half of Americans are financially fragile. While financial fragility is more severe among those with low educational attainment and no financial education, families with children, those who suffered large wealth losses, and those who are unemployed, a sizable fraction of seemingly “middle class” Americans also judge themselves to be financially fragile. We examine the coping methods people use to deal with shocks. While savings is used most often, relying on family and friends, using formal and alternative credit, increasing work hours, and selling items are also used frequently to deal with emergencies, especially for some subgroups. Household finance researchers must look beyond precautionary savings to understand how families cope with risk. We also find evidence of a “pecking order” of coping methods in which savings appears to be first in the ordering. Finally, the paper compares the levels of financial fragility and methods of coping among eight industrialized countries. While there are differences in coping ability across countries, there is general evidence of a consistent ordering of coping methods

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17072.

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    Date of creation: May 2011
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    Handle: RePEc:nbr:nberwo:17072

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    1. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-53, October.
    2. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
    3. Andrew C. Worthington, 2003. "Emergency finance in Australian households An empirical analysis of capacity and sources," School of Economics and Finance Discussion Papers and Working Papers Series 163, School of Economics and Finance, Queensland University of Technology.
    4. Steven F. Venti & David A. Wise, 2001. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Chapters, in: Aging Issues in the United States and Japan, pages 25-64 National Bureau of Economic Research, Inc.
    5. Asena Caner & Edward N. Wolff, 2004. "Asset Poverty In The United States, 1984-99: Evidence From The Panel Study Of Income Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(4), pages 493-518, December.
    6. Melissa Schettini Kearney & Peter Tufano & Jonathan Guryan & Erik Hurst, 2010. "Making Savers Winners: An Overview of Prize-Linked Savings Products," NBER Working Papers 16433, National Bureau of Economic Research, Inc.
    7. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, vol. 99(1), pages 49-84, March.
    8. Melvin Stephens Jr., 2003. ""3rd of tha Month": Do Social Security Recipients Smooth Consumption Between Checks?," American Economic Review, American Economic Association, vol. 93(1), pages 406-422, March.
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    Cited by:
    1. Elliott, William & Kim, Johnny S., 2013. "The role of identity-based motivation and solution-focus brief therapy in unifying accounts and financial education in school-related CDA programs," Children and Youth Services Review, Elsevier, vol. 35(3), pages 402-410.
    2. Atalay, Kadir & Bakhtiar, Fayzan & Cheung, Stephen L. & Slonim, Robert, 2012. "Savings and Prize-Linked Savings Accounts," IZA Discussion Papers 6927, Institute for the Study of Labor (IZA).
    3. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2012. "Credit Supply and House Prices: Evidence from Mortgage Market Segmentation," NBER Working Papers 17832, National Bureau of Economic Research, Inc.
    4. Greg Kaplan & Giovanni L. Violante, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," NBER Working Papers 17338, National Bureau of Economic Research, Inc.
    5. Barbara Cavalletti & Corrado Lagazio & Daniela Vandone & Elena Lagomarsino, 2012. "The role of financial position on consumer indebted-ness. An empirical analysis in Italy," DEP - series of economic working papers 8/2012, University of Genoa, Research Doctorate in Public Economics.
    6. Miller, Margaret & Reichelstein, Julia & Salas, Christian & Zia, Bilal, 2014. "Can you help someone become financially capable ? a meta-analysis of the literature," Policy Research Working Paper Series 6745, The World Bank.
    7. Jacob S. Hacker & Gregory Huber & Austin Nichols & Philipp Rehm & Mark Schlesinger & Robert G. Valletta & Stuart Craig, 2012. "The Economic Security Index: a new measure for research and policy analysis," Working Paper Series 2012-21, Federal Reserve Bank of San Francisco.
    8. Yun Kim & Mark Setterfield & Yuan Mei, 2013. "A Theory of Aggregate Consumption," Working Papers 1301, Trinity College, Department of Economics.

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