Financial stability is crucial for the well-being and quality of life of individuals and families. However, a significant portion of the US population struggles to achieve financial stability due to various socioeconomic factors. This article will examine the prevalence of financial instability in the United States.
What Does it Mean to be Financially Unstable?
Financial instability refers to the inability of individuals or households to have sufficient income to cover necessary living expenses and absorb financial shocks. According to the Federal Reserve, signs of financial instability include:
- Difficulty covering expenses like rent, utilities, food, healthcare, transportation, and debt payments
- Low or no savings to handle emergency costs or setbacks
- Reliance on credit cards to bridge the gap between income and expenses
- Frequent overdrafting of checking accounts
Those who are financially unstable live paycheck to paycheck, struggle with debt, and are at high risk of poverty and homelessness if an unexpected crisis arises.
What Percentage of Americans are Financially Unstable?
Surveys and studies on household finances reveal that a significant portion of the US population lacks financial stability:
- A 2019 Federal Reserve report found that 37% of Americans would struggle to cover an unexpected $400 expense with cash, savings, or credit cards they could quickly pay off.
- A 2022 LendingClub survey found 61% of Americans were living paycheck to paycheck, up from 55% the prior year.
- One in three adults have no emergency savings whatsoever, according to a 2022 Bankrate survey.
- Nearly one in five households have zero or negative net worth, per Census data.
Taken together, these statistics indicate at least one-third to close to two-thirds of the population lack adequate financial buffers and are at high risk of hardship if faced with job loss, illness, or other financial setbacks.
Key Demographics Experiencing Financial Instability
While financial challenges cut across demographics, data shows certain groups are more likely to experience financial instability and hardship:
Lower Income Households
- 78% of adults living below the federal poverty line find it very difficult to cover usual household expenses.
- 62% of those making less than $40,000 a year live paycheck to paycheck.
Younger Adults
- 63% of millennials say they live paycheck to paycheck.
- Over half of millennials have nothing saved for retirement.
Racial and Ethnic Minorities
- 61% of Black households and 57% of Hispanic households have less than $10,000 in family liquid assets, compared to 37% of White households.
- The median net worth of White households is nearly 8 times higher than Black households and over 5 times higher than Hispanic households.
Households Headed by Single Mothers
- 49% of children under 18 live in households headed by single mothers.
- Single mother households have the highest poverty rate at 35.7%.
This data underscores how race, income inequality, age, and family structure intersect to disproportionately expose certain groups to financial instability.
Geographic Disparities in Financial Stability
Financial security also varies significantly depending on where people live. According to Prosperity Now’s 2022 Scorecard on household financial health:
- The top 10 states for financial security are: Utah, Washington, Minnesota, New Hampshire, Hawaii, Vermont, Wyoming, Alaska, Maryland, and New Jersey.
- The bottom 10 states are: Mississippi, Louisiana, Kentucky, Arkansas, West Virginia, Alabama, Oklahoma, South Carolina, Texas, and Nevada.
In general, households in Southern states fare worse than other regions when looking at factors like liquid asset poverty, debt delinquencies, homeownership rates, access to health insurance, and net worth.
Liquid Asset Poverty by State
Liquid asset poverty measures households without sufficient savings to subsist above the poverty line for three months without income. The states with the highest rates of liquid asset poverty are:
| State | Liquid Asset Poverty Rate |
|---|---|
| Mississippi | 54.5% |
| Kentucky | 52.5% |
| Arkansas | 52.2% |
| Alabama | 51.3% |
| Louisiana | 50.3% |
This table illustrates the disadvantage faced by low-income households in Southern states when it comes to emergency savings.
Causes and Consequences of Financial Instability
What factors contribute to the widespread financial insecurity across the United States? And what are the implications for households as well as the broader economy?
Causes
The root causes of financial instability include:
- Stagnant wages and income inequality – Real wages have barely budged in 40 years for many workers, while incomes for top earners have skyrocketed. This trend has depleted middle class wealth.
- Rising cost of living – Expenses for basics like housing, health care, education, child care have risen much faster than incomes, consuming an increasing share of household budgets.
- No savings and emergency cushions – Nearly half of Americans do not have $400 – $1000 available for emergency savings which makes them vulnerable.
- Easy access to credit – Reliance on credit cards and personal loans to make up for shortfalls can result in downward debt spirals.
- Precarious employment – Irregular work schedules, lack of benefits, and gig employment provides unsteady earnings for many workers.
- Lack of social safety net – The U.S. spends much less on social welfare programs compared to other developed nations.
- Systemic discrimination – Discrimination in housing, pay, banking, health care, and education undermines minority financial security.
Consequences
Financial instability not only harms individuals and families. It also drives:
- Poorer health outcomes
- Higher healthcare costs
- Lost productivity and absenteeism at work
- Higher usage of public assistance programs
- Crime rates and social unrest
- Lower labor force participation
- Less geographic mobility
- Lower business formation and economic growth
In aggregate, individual financial distress impedes broader economic prosperity.
Policy Solutions to Promote Financial Stability
Given the far-reaching consequences of such widespread financial instability, policymakers, employers, and the financial industry must take action to promote greater financial security across the socioeconomic spectrum. Potential solutions include:
- Raise the minimum wage to boost incomes for low-wage workers.
- Expand the Earned Income Tax Credit to supplement wages for lower income households.
- Invest in affordable housing to reduce housing cost burdens.
- Cap child care costs as a percent of income through subsidies.
- Offer employer-sponsored emergency savings plans to help workers accumulate rainy day funds.
- Enact paid family and medical leave so workers do not lose income to health crises.
- Regulate predatory lending and high-interest debt traps.
- Support financial literacy programs, especially for youth.
- Increase public assistance asset limits so families can save without losing benefits.
- Reform credit scoring models that disadvantage minority, young, and low-income borrowers.
Targeted interventions that make it easier for people to earn, save, and access credit on fair terms can help build widespread financial security and resilience.
Conclusion
Financial instability and vulnerability afflicts a significant portion of the U.S. population, cutting across regions, ages, and demographics. Stagnant wages and incomes, the high cost of living, lack of savings and benefits, discrimination, and credit traps converge to deprive many households of financial security. Individuals and policymakers alike must take action to reform the systems and structures that foster such widespread insecurity. Promoting financial stability for all Americans will lead to greater prosperity and well-being for individuals, communities, and the overall economy.