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Why half of Americans can’t come up with $400 in an emergency

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As recently as 2016, the Federal Reserve surveyedmore than 5,000 Americans about their financial situation. Among the findings was one startling statistic: Approximately 46% of Americans stated they do not have enough money to cover a $400 emergency expense.

For most of us, it’s not difficult to imagine a scenario where an expense like this could arise. Car repairs, a medical bill and even a basic home repair can easily reach $400.

How did so many Americans get here? More importantly, how can we improve?

A systemic problem

This figure doesn’t represent a sudden upheaval in American lives. In fact, the figure represents an improvement in people’s finances relative to previous studies from the Federal Reserve. A long list of other studies supports this finding.

Author Neal Gabler reported on the work of one economist, who concluded that in the event of a job loss, “a family in the middle quintile, with an average income of roughly $50,000, could continue its spending for … six days.” This finding is scary, and it isn’t much better at the next income level. “Even in the second-highest quintile, a family could maintain its normal consumption for only 5.3 months,” Gabler continues.

Why is this the case? Have we become a nation of capricious spenders? Have we collectively fallen into financial illiteracy?

A review of the numbers from The Economic Policy Institute reveals a different answer. Those numbers show that, “Over the entire 34-year period between 1979 and 2013, the hourly wages of middle-wage workers (median-wage workers who earned more than half the workforce but less than the other half) were stagnant, rising just 6%—less than 0.2% per year.” Simply put, wage stagnation is the problem for the majority of Americans.

Even the benefit of a college education doesn’t safeguard against this kind of outcome. The same research shows that the inflation-adjusted hourly wages of young college grads (men and women alike) were actually lower than they were in the late 1990s.

While the Great Recession has contributed to much of this problem, stagnation has been a problem for decades and, “after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979,” according to The Pew Research Center. Some will argue that we are nearly a decade removed from the upheaval of 2008 and that things have changed. This sentiment is true, but not in the way most people imagine. Research from The National Employment Law Project found that “employment growth during the early recovery was heavily concentrated in lower-wage industries.” Therefore, the question remains: What do we do about it?

A surprisingly simple solution

Behold the mighty budget! It’s the cure for all financial woes. Or is it? The fact of the matter is that budgeting, for most of us, simply doesn’t work. The reason why is something we can all identify with: fluctuating expenses.

A budget is not much use if you’re saddled with variable expenses. The JPMorgan Chase Institute illustrates the commonality of this problem with its research, which concluded that “very few individuals follow a consistent monthly budget that sets strict parameters on spending.” However, hiding in the conclusion of the same report is a nugget of wisdom: “… most individuals would benefit from innovative tools to better understand and manage their bottom line.” If budgeting isn’t the answer, perhaps the more casual approach of simply being cognizant of your spending is.

A separate study conducted by Personal Capital supports the efficacy of this approach. In their paper, the researchers found that those who viewed their aggregated financial information an average of 12.47 times a month saw a decrease of 15.7% in their spending within the first four months.

A drill down in the data shows even more encouraging results. Discretionary categories fell even further. Dining out dropped by 19.2%, while grocery spending fell by 20.7%.

This data is reassuring because it presents a framework of saving that doesn’t require lengthy spreadsheet work or pouring over every little transaction for the month. The solution is to simply look at your spending more frequently. Budgets, while commendable, don’t account for the inevitable swings in unexpected bills, especially the ones that total $400.

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