Here’s why so many Americans can’t come up with $400 to pay for an unexpected expense

The statistic is used to show how unequal things have become in the U.S.: Some 40% of Americans would struggle to come up with even $400 to pay for an unexpected bill.

If — or, more likely, when — they’re confronted with such an expense, they’d probably have to sell something or go into debt. The now oft-cited figure comes from the Federal Reserve’s 2018 Survey of Household Economics and Decision Making, in which some 12,000 households were asked about their financial well-being.

Just how have so many Americans become so short on cash? Anqi Chen at the Center for Retirement Research at Boston College recently tried to answer that question. “If that many people can’t cover a very small, unexpected expense, how can we expect them to save for retirement?” Chen said, explaining the center’s interest in the bleak finding.

At first, only more questions emerged. Mainly, there appeared to be a gulf between what people said they could afford and what they actually could. Two surveys — both administered by the Federal Reserve — seemed to produce conflicting results.

The Survey of Household Economics and Decision Making asks people how they would pay for an unforeseen $400 expense. If a respondent said they simply wouldn’t be able to or would have to borrow money, sell something or neglect other bills to do so, they were included in the share of people for whom coming up with the money would be a challenge, which added up to that alarming 40%. Yet the Survey of Consumer Finances, which asks respondents for their bank account balance, found the share of households who have less than $400 in their checking or savings accounts was closer to 20%.

For some reason, many people who had $400 on hand still said they’d struggle to come up with the money. “We were scratching our heads,” Chen said.

Ultimately, the researchers landed on a plausible explanation for both the discrepancy and why so many Americans are living paycheck to paycheck — debt. Many of the people who have $400 or more available to them likely have already earmarked that money for another obligation (and so, in other words, the cash isn’t really available to them).

Frequently, Chen said, it’s an upcoming credit card bill tying up the money. Indeed, after the researchers at Boston College subtracted people’s outstanding credit card debt from their account balances, the disparity between the two surveys all but closed.

“Unpaid credit card balances are high-interest loans,” Chen said. “I’m not surprised that households want to pay that off as quickly as they can.” (The average interest rate today is almost 18%, compared with 12% a decade ago, according to Creditcards.com.)

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Even in more affluent houses, debt sucks up cash. In the Survey of Consumer Finances, which again asks people for their bank balance, just 1% of families with an income over $100,000 reported that they have less than $400.

Yet in the other, more subjective survey, 17% of such households said they would have trouble coming up with $400. Higher earners are contending with mortgages, installment loans, and “about half of them have student loans,” Chen said.

While many Americans are broke because they recently lost a job or have only a high school degree, many others are just turning their paychecks over to debt collectors.

“These loan payments,” the researchers conclude, “could explain why so many middle- and higher-income households do not have precautionary savings.”