Council Post: The Reality Behind The $400 Emergency Expense Number

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Anuj Nayar is the first financial health officer at LendingClub,

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On May 23, 2022, the Federal Reserve System released its annual report on the Economic Well-Being of US Households in 2021, The report surveyed the financial health of Americans between late October and early November of 2021, covering financial well-being, employment, banking and credit. While the economic environment looks very different presently, 78% of okay or said they were either doing okay living comfortably financially. In spite of that, one number in particular sticks out: $400 for an emergency expense.

Since 2013, the report has asked consumers if they could cover a hypothetical emergency expense of $400, and the striking findings have been widely covered in news media when talking about the financial well-being of Americans. Sixty-eight percent of all adults said they would have covered the expense exclusively using cash, savings or a credit card paid off at the next statement. One in 9 even reported they wouldn’t be able to cover a $400 emergency expense whatsoever. But nine years later, is it worth asking, why the Federal Reserve continues to use $400 as a base number when our economy has completely turned on its head?

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The $400 emergency expense number, in my opinion, is outdated. Here’s why:

Recessions And Inflation

The US has experienced a number of recessions within the past two decades. With the 2001 dot-com bubble, 2007’s mortgage crisis, 2020’s Covid crisis and a potential recession on the horizon, the economy has proved that it ebbs and flows.

Current macroeconomic conditions, including mounting inflation and the Fed’s rate increases, are weighing on consumers’ economic outlooks. Inflation has accelerated to a historic 9.1%—making essentials more expensive. The national gas price is average over $5 per gallon at the time of writing, resulting in households spending about $160 more per month on gas than they were a year ago.

The Fed has recently hiked interest rates significantly. New interest rates coupled with inflation will have a major impact on the cost of borrowing and credit card debt. If you take inflation into consideration, a $400 expense in 2000 would be equivalent to a $702.16 expense in 2022 according to the CPI Inflation Calculator,

Many Americans Are Living Paycheck To Paycheck

There are a number of factors that should be taken into consideration when surveying Americans’ financial well-being. It’s not only people in lower income brackets who are feeling the impact of inflation and higher rates. New data from our company, LendingClub, and PYMNTS found that more than half of US consumers were living paycheck to paycheck in May 2022, a 4 percentage-point increase from May 2021. Also, 3 in 10 consumers making $250K or more annually ( the top 5% of income earners in the country) are living paycheck to paycheck.

Additionally, half of consumers living paycheck to paycheck say their salary only covers basic expenses and is one reason behind their financial woes, and 65% of paycheck-to-paycheck consumers said they have experienced a financially stressful event in the past three years. With rising inflation and continued economic uncertainty, various factors may continue to impact consumers’ financial outlook.

We Need To Be Realistic

Given all of the above-mentioned changes that Americans have experienced, let’s consider what a $400 emergency expense might look like today. The report states, “Financial preparedness is an important buffer for those who encounter unexpected events, such as medical expenses or disruptions from natural disasters,” in the context of the $400 expense number. I would argue that $400 does not prepare consumers for unexpected expenses.

For example:

• The average cost of an ambulance in California is $589.

• The national average for a roof repair is $950.

• The median cost to replace four tires is $668.

As shown in these examples, the $400 expense number does not adequately reflect the cost of various emergency expenses today.

Other surveys also show that Americans do not feel financially prepared. For example, according to a survey conducted by the American Psychological Association, roughly 87% of Americans said inflation and the rising costs of everyday expenses were causing them stress. And, according to a recent Bankrate Survey, about 2 in 5 American adults said money negatively impacts their mental health. Rising costs in all facets of life have consumers on edge. And now, workers say on average it will take $1.1 million to retire comfortablyaccording to the 2022 Schroders US Retirement Survey.

The impact of rate increases and inflation may only further exacerbate the effects on consumers who are already struggling to stay afloat. It will be interesting to see whether, in next year’s report, the Fed decides to make needed adjustments to reflect a more realistic emergency expense number.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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