How vulnerable are Americans to unexpected expenses?

Press release

Notwithstanding its importance to households and policymakers alike, the resilience of households to expense shocks is difficult to measure with precision. In a widely reported 2023 survey, 62 percent of American adults said they were living paycheck-to-paycheck, defined as a “household [relying] on their regular paychecks to meet their expenses and financial obligations, with little or no savings left over.”¹ In contrast, the Federal Reserve Board’s Survey of Household Economics and Decisionmaking (SHED) recently reported that only 13 percent of adults would be unable to pay a $400 emergency expense.² Though these surveys both suggest that a significant fraction of Americans may be vulnerable to an emergency expense, their results are somewhat contradictory; it is difficult to confidently assess how many people are exposed to this vulnerability.

While some aspects of financial security are well covered in prior research, others have been more difficult to evaluate, and there are few data sources that inform how households jointly rely on different sources of liquidity.³ In particular, no public administrative data sources regularly provide a view that informs how households might use cash, credit, and other sources of liquidity in combination to respond to expense shocks.

To fill this gap, we use de-identified administrative banking data to provide a more comprehensive view of households’ financial security by measuring the cash balances, income, spending, and credit access of 5.9 million households. We estimate how many households could weather a hypothetical emergency expense and examine what sources of liquidity they could draw on.

We find that most households have sufficient liquidity to weather moderate expense shocks, and that sources of liquidity beyond cash savings are the key to many households’ ability to weather an emergency expense. Overall, 8 percent of our sample is unable to cover a $400 expense shock by any combination of cash on hand, disposable income, or use of short-term credit.

Additionally, we find that:

1. 77 percent of low-income households can cover an unexpected $400 expense, though many must cover it with disposable income or short-term credit.
2. 43 percent of low-income households unable to weather small expense shocks might be able to pay them with access to additional credit.
3. The share of households that cannot cover an unexpected expense remained steady throughout 2022 and 2023.
4. White and Asian households, middle-aged households, and multi-person households are better able to cover an unexpected expense than their counterparts.

These findings have significant implications for experts concerned about the financial resilience of American households.

First, considering cash savings alone as a source of financial resiliency leads to an unnecessarily pessimistic view of financial resilience and how many households are living paycheck-to-paycheck. For example, households that contribute to a retirement plan and have an established rainy-day fund may comfortably spend most of their income every month and still be very resilient to emergency expenses. Our finding that a vast majority of households—including low-income and young households—have enough cash and disposable income to cover emergency expenses contradicts claims that most American households are living “paycheck-to-paycheck.”

Another important lesson from these findings is how important affordable credit access is for financial resilience. This is especially true for larger expenses; removing access to credit cards cuts the number of low-income households able to weather a $1,600 shock by 31 percent (25 percent coverage compared to 37 percent). Moreover, 43 percent of low-income households unable to cover a smaller $400 expense might have been able to do so if they had additional credit access.

Overall, household liquidity is complex, made up of many components and constraints. Our results shed light on several new pieces of the picture, and upcoming Institute research will continue to investigate liquidity dynamics and financial resilience. 

Many discussions of liquidity focus on cash balances. The JPMorgan Chase Institute’s Household Pulse series tracks households’ cash reserves over time, assessing alignment with historical expectations following the build-up of excess savings after the COVID-19 pandemic (Wheat et al. 2024). Publicly available metrics also track household savings, measuring excesses relative to pre-pandemic levels (Abdelrahman and Oliveira 2023). Additional research follows trends in cash buffers—balances scaled to spending—and how that metric responds to changes in cash balances (Wheat and Eckerd 2023; Wheat et al. 2024). These reports provide important but incomplete views into household liquidity, focusing primarily on availability of cash. Going beyond available cash, we track additional sources of liquidity to provide a more complete picture of the liquid resources a household can access when unexpected expenses arise. We present our primary findings in stacked bar charts, showing the share of households that are able to cover an expense shock of a specified size by first using available cash, then turning to disposable income if cash cannot fully cover the expense, and finally using credit cards to cover the remainder if necessary.

We find that overall, 8 percent of our sample is unable to cover a $400 expense shock by any combination of cash on hand, disposable income, or use of short-term credit (Figure 1). This figure is lower than the latest SHED survey, which reported that 13 percent of households are unable to cover a $400 shock and dramatically lower than the reported 62 percent of households that are living paycheck-to-paycheck. Breaking down the components of our results, we see that 13 percent of households are unable to cover the expense without use of credit cards. If SHED respondents thought of any use of credit as being unable to cover the expense, that could explain some of the differences in outcomes.

We also find meaningful variation in both the ability of families to cover a $400 expense shock by income, as well as the methods they would use to cover it. Nearly all of the highest-earning households can cover the expense, 99 percent via cash on hand and disposable income (Figure 2). But even among the lowest-earning households, 77 percent are also able to cover a $400 expense. Cash and disposable income don’t go as far for these households: only 43 percent can cover the expense solely via cash on hand, and an additional 22 percent by diverting disposable income. Short-term use of credit cards enables an additional 12 percent of low-income households to cover the expense (7 percent using free single-month credit, and the remaining 5 percent needing to incur some interest fees to pay the amount back over a few months).¹⁰

Available credit becomes a more important part of the story for larger unexpected expenses, even for higher-earning households (Figure 3). For the lowest-income households, only 25 percent can cover a $1,600 expense shock using cash or disposable income; short-term use of credit enables and additional 12 percent to cover the expense, still leaving 63 percent unable. While households in the second and third income quartiles are less often unable to cover the expense—35 percent and 15 percent, respectively, cannot cover—access to credit cards plays an important role. While use of credit does not play a large role in their ability to cover a $400 expense shock—enabling 5 percent and 2 percent of households to cover the expense—it becomes a much more impactful lever for larger expenses. Ability to float the expense on a credit card for one to three months enables 17 percent of households in the second income quartile and 13 percent of households in the third income quartile to cover the expense shock, contributing substantially to middle-income households’ ability to cover larger expense shocks.

As shown in Finding One, many families may find the use of short-term credit to be an important mechanism for covering expense shocks. For all but the highest-income households, credit enables at least an additional 10 percent of households to cover an unexpected $1,600 expense shock when cash and disposable income fall short. Of course, many households are still unable to cover such an expense, including 63 percent of the lowest-earning households and even 3 percent of the highest-earning households.

To better understand the households that cannot cover an expense shock, we explore the limiting factor for coverage. If the household had additional available credit to draw on for short-term help, would that enable them to cover the expense? Figure 4 shows the share of households that cannot cover an unexpected $400 expense due to either income constraints or credit constraints. For moderate shocks of $400, 10 percentage points of the total 23 percentage points of households that cannot cover the expense (43 percent) would be able to do so if they had additional credit available. We refer to these households as credit constrained. However, for the remaining households, simply increasing available credit would not solve the problem, as their disposable income is not sufficient to pay back the credit within a three-month window. We refer to these households as income constrained. For larger $1,600 expense shocks, income constraints are the binding factor for the lowest-income households: an additional 11 percent of households could cover the expense with additional available credit, but the remaining 53 percent would still be unable to do so (Figure 5). For households in the top three income quartiles, 37 to 48 percent of the households that cannot cover the $1,600 expense are constrained by credit availability, with the remaining households constrained by disposable income.

Plotting over time, we see remarkably consistent monthly results throughout 2022 and 2023 (Figures 6 and 7). The proportion of households that are unable to cover an expense shock of a given amount remains steady over time for each income quartile. We observe slight seasonal decreases around March/April each year, coinciding with tax refund timing when cash balances tend to be elevated. Higher than usual cash balances result in fewer households that are unable to cover an unexpected expense, shown by the seasonal decreases in Figures 6 and 7. 

We note that broad macroeconomic trends that drove increases in households’ expenses have not resulted in greater shares of households unable to cover expense shocks. From 2022 to 2023, interest rates increased, resulting in larger debt payments and higher credit card interest charges for many households.¹¹ This has also been a time of high inflation, driving up the cost of necessities and causing considerable consumer stress.¹² These factors are incorporated in our monthly disposable income calculations (income after debt payments and other non-discretionary expenses such as groceries) as well as in our cost of short-term credit use, where we calculate incurred interest fees based on monthly interest rates. Yet despite rising household expenses, we do not see increases in the share of households that are unable to cover unexpected expenses.

Differences between race and ethnicity groups in ability to cover an unexpected expense are primarily driven by differences in cash liquidity (Figure 8).¹³ Across race and ethnicity groups, around 90 percent of households can cover a $400 expense shock (93 percent of Asian and White households, 90 percent of Hispanic households, and 89 percent of Black households), but we see differences in how households cover the expense. 72 percent of Asian households and 71 percent of White households can cover the expense using cash on hand, and an additional 17 to 18 percent would have to use some disposable income to help cover the expense. Hispanic and Black households, on the other hand, have lower cash liquidity: 62 and 59 percent, respectively, can cover the expense using only cash on hand, and an additional 22 to 24 percent would have to use a combination of cash and disposable income to cover the expense. In other words, relative to Asian and White households, Hispanic and Black households are less likely to be able to cover a $400 expense using only cash on hand; however, they make up some of this deficit with a higher proportion of households that can supplement cash with disposable income to cover the expense.

When considering a larger $1,600 expense shock, we only observe differences between race and ethnicity groups in cash on hand coverage rates (Figure 9). Similar to the $400 expense, we observe a roughly 12 percentage point difference in ability to cover the expense using only cash on hand (53 percent of Asian households and 52 percent of White households, compared to 41 percent of Hispanic households and 39 percent of Black households). The remaining coverage methods are consistent across groups, with 12 to 13 percent of households supplementing cash with disposable income, and 10 to 12 percent relying on short-term credit use to cover the remainder of the expense. 

Availability of cash liquidity also plays an important role in differentiating household ability to cover an unexpected expense by age: the oldest households primarily rely on cash to weather expense shocks, whereas younger households can draw on more disposable income to cushion the shocks (Figures 10 and 11). For expenses of $400 or $1,600, the youngest households (ages 18 to 34) are 6 to 9 percentage points less likely to be able to cover the expense using just cash on hand, compared to middle-aged households (35 to 54) and older households (55 and older). But the coverage trends reverse for households that rely on a combination of cash and disposable income to cover the expense, where we see the oldest households come out behind both younger groups. For a $1,600 expense shock, 41 percent of the youngest households can cover the expense using cash on hand, compared to 50 percent of middle-aged households and 48 percent of the oldest households. Younger households are able to supplement available cash with disposable income, enabling an additional 19 percent of the youngest households and 15 percent of middle-aged households to cover the expense. That disposable income can also be leveraged to pay back short-term credit use, covering a further 14 percent of young households and 12 percent of middle-aged households. For the oldest households, however, disposable income only enables an additional 6 percent of households to cover the expense, and a further 9 percent can cover via use of short-term credit. This leaves the oldest households the least able to cover the expense shock, with 37 percent of households unable to cover the expense, compared to 26 percent of the youngest households and 23 percent of middle-aged households. Despite healthy cash reserves, lower disposable income leaves the oldest households more vulnerable to unexpected expenses than their younger counterparts.

Continuing this pattern, results vary by household size, with two-person households more able to cover emergency expenses than single-person households, and cash liquidity primarily driving the gap (Figures 12 and 13). For large $1,600 emergency expenses, 37 to 42 percent of single-person households can cover the expense using only available cash, compared to 66 to 73 percent of two-person households. An additional 25 percent of single-person households and 19 to 22 percent of two-person households can cover the expense by diverting disposable income or using short-term credit. For a given household size, all-female households are less able to cover a $1,600 expense using only available cash, and slightly less likely to be able to cover the expense at all.

Conclusions

The vast majority of households can cover a $400 expense shock using some combination of cash on hand, disposable income, and short-term credit and that has remained consistent over recent years. Overall, 92 percent of households can cover a $400 expense shock, including 77 percent of households in the lowest income quartile. With the exception of small variations around tax time each spring, those proportions have remained remarkably consistent since the start of 2022. Despite recent high inflation and increasing interest rates, household ability to cover expense shocks has not decreased. This holds even for larger $1,600 expense shocks: despite fewer households being able to cover these larger expenses, ability to cover has been consistent during our sample window. However, this could change as inflation, interest rates, and labor market forces continue to evolve. We will revisit these time series assessments in future work, extending our sample window to cover data into 2024 as well as prior to the COVID-19 pandemic.

Credit access plays an important role in financial security, enabling households to weather expense shocks when cash and disposable income fall short. Cash and disposable income are insufficient for many households to cover even small $400 expense shocks. For the lowest-earning households, 11 percent rely in part on short-term credit use to cover the expense. For larger unexpected expenses of $1,600, use of short-term credit enables an additional 14 percent of low-to-medium income households to cover the expense when they otherwise would be unable. Expanding access to credit may further support some households when faced with expense shocks. Of the households in our sample that were unable to cover a $400 expense shock, 43 percent would have been able to cover the expense if they had more available credit. However, if those households had higher credit limits on their open credit cards, we cannot know whether that additional credit would be available for use when an expense shock arises. It is possible that households would increase their credit usage and reach a new equilibrium at a higher balance, thus still falling short of the needed available credit when the unexpected expense occurs. Additional research is needed to establish whether additional credit line would remain open—and thus available for use in the event of a shock—or get used on non-emergency expenditures and thus be unavailable to help with future expense shocks.

Cash balances alone under-estimate a household’s resilience to unexpected expenses. While measurement of cash balances has been an important part of tracking household financial health in the aftermath of the COVID-19 pandemic, cash reserves are not households’ only source of financial stability. This report shows that available cash is important as one method for covering unexpected expenses, enabling households to weather financial shocks. It also shows that many households rely on repurposing disposable income and utilizing short-term credit in order to cover unexpected expenses. These latter methods of expense coverage supplement available cash, enabling many incremental households to weather expense shocks. For example, for households in the lowest three income quartiles facing a $1,600 unexpected expense, roughly 42 percent of households that can cover the expense would do so in part via repurposing disposable income and using short-term credit. In other words, accounting for these additional methods of expense coverage allows us to see a more complete picture of how households can cover unexpected expenses and which groups are able to do so.

Groups with less available cash are less able to cover expense shocks and more reliant on reallocating disposable income and using short-term credit, resulting in decreased near-term savings and additional interest charges. Households with low cash on hand are particularly vulnerable to unexpected expense shocks, either incurring negative secondary financial effects in order to weather the shock, or unable to cover the amount at all. This includes households with the lowest incomes, Black and Hispanic households, single-person households, and households aged 55 and over.

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