Americans get poorer as expenses surge

Americans are getting poorer as expenses climb and savings dwindle, according to a new survey from LendingClub Corporation, the parent company of LendingClub Bank, a digital marketplace bank. 

In May 2023, the Fed released the “Economic Well-Being of U.S. Households in 2022,” the latest edition of an annual report commonly used in measurements of financial well-being. Since 2013, these annual reports have tracked consumers’ stated ability to afford a theoretical $400 emergency expense — a number that seems outdated in today’s economic environment, LendingClub reported. 

LendingClub and PYMNTS have examined this issue since 2022 and have found that the $400 benchmark does not accurately reflect today’s consumer experience, per a press statement. “In fact, two-thirds of the unexpected expenses consumers experienced cost more than the benchmark of $400, with 41% spending double that amount or more,” the statement said. “Furthermore, the average emergency expense was approximately $1,700, reflecting a year-over-year growth of 16 percent.”

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How does this study demonstrate and reveal how unexpected expenses are surging for consumers?

Alia Dudum, money expert with LendingClub, says this study ultimately shows that the Fed’s $400 emergency expense benchmark, which has remained the same for 10 years, is no longer an accurate figure to use when assessing a consumer’s overall financial well-being as it doesn’t factor in inflation over the last decade or address the macroeconomic volatility we’ve seen since the beginning of the pandemic.

For example, she added, two-thirds of the unexpected expenses consumers experienced cost more than the benchmark of $400, with 41% spending double that amount or more. “The reality is nearly half (46%) of U.S. consumers stated they faced an unexpected emergency and the cost of that expense averages $1,700. We’re seeing a false sense of security where consumers feel they have enough savings and/or available cash to cover unexpected expenses,” continued Dudum. “The question is, as unexpected emergencies become more frequent and the cost for those expenses continues to rise, have consumers really prepared enough and will the same saving levels from previous years be enough to help them navigate the future?”

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Why are people strapped to save for an emergency, and is that challenge due to a paycheck-to-paycheck lifestyle?

While the share of consumers who are living paycheck to paycheck and the share of those who have faced an emergency expense are both virtually unchanged from July 2022, Dudum says the average cost to consumers of these expenses continues to inflate and has grown 16% over last year.

“For example, from July 2022 to May 2023, on average, vehicle repairs have increased by about $260, health-related occurrences have increased by about $100, unexpected high bills or taxes have risen by over $1,000, and house-related issues or relocations have risen by about $150,” Dudum tells FOX Business. “A financial situation, alongside the cost of the repair, affects how the individual can actually pay for the expense.” For example, 51% reported paying with cash or with money from their savings, while 33% used financing or alternative sources, and even fewer used credit cards, revolved the balance or used installments, Dudum said. 

How does age impacts preparedness for unexpected expenses?

According to Dudum, the research finds that nearly half (46%) of consumers have faced unexpected emergencies, with millennials and high-income consumers facing them at even higher rates.

“Most unexpected expenses are related to necessary repairs or replacements, so it’s no surprise that affluent consumers who own vehicles and homes face these the most often,” Dudum tells FOX Business. “In fact, consumers earning more than $100,000 annually were 34% more likely to have faced these expenses than their lower-income counterparts.”

Also, she reports how high-income and millennial consumers are generally at peak-earning periods in their careers, supporting growing families while paying off mortgages, car loans and other debts. “As with all expenses, inflation impacts emergency expenditures, which again, is increasing the average emergency spend well above the Federal Reserve $400 benchmark,” Dudum continues. 

How can people start a plan to be more prepared for unexpected financial needs?

Dudum says there are a few steps individuals can take to start the process of getting a handle on their spending and moving toward building an emergency savings plan, paying down their debt and then moving towards saving for retirement. 

1. Build and fuel an emergency fund regularly. If the last three years have taught us anything, it’s that the unexpected will happen, and emergencies are unavoidable, she says. “Start by setting aside money monthly specifically for emergencies. Aim to save at least three to six months’ worth of your living expenses,” Dudum recommends.
2. Minimize your debt. She advises to prioritize paying off high-interest debts, such as credit cards, and reduce the urge to revolve on those cards and pay off the full balance every month.
3. Find opportunities to enhance your savings. For example, many banks, including LendingClub, offer high-yield savings accounts with an annual percentage yield of over 4%. “If you have money sitting in a savings account that doesn’t yield you at least that, consider changing to one that does so you can passively make more,” Dudum tells FOX Business. “And automatically fuel that account.”
4. Revise your insurance coverage. Since we know emergencies happen, Dudum stressed it’s always a good idea to review your insurance coverage such as health insurance, homeowner’s or renter’s insurance, and car insurance to ensure that you have adequate coverage to protect you and your family in case of emergencies.