Number of Americans able to cover $400 emergency hits 9-year high

Talk about good news.

Key points

• It is important to have cash on hand at all times for emergencies.
• The number of Americans who can cover an expense of $400 entirely in cash or its equivalent hit a new high late last year.

You never know when a sudden need for money might arise. Your car could break down, leaving you with a big bill to have it towed and repaired. Or, you might encounter an expensive home repair that can’t be postponed, or a medical condition that your insurance plan won’t fully cover.

Additionally, you could lose your job at any time, especially if economic conditions deteriorate. Many people learned this the hard way in early 2020, when COVID-19 restrictions caused a massive wave of unemployment.

This is why it is important to have money in a savings account at all times. And new data from the Federal Reserve reveals that Americans may be doing a better job of it.

In a May 2022 report based on data from late 2021, the Federal Reserve found that 68% of Americans could cover an emergency expense of $400 in cash or its equivalent. For example, some people said they could pay this kind of bill by swiping a credit card, but paying their balance in full when their statement came in.

Of course, the bad news is that 32% of Americans clearly couldn’t cover a $400 cash emergency or its equivalent at the end of last year. But the good news is that the share of people who can easily afford such an expense has reached its highest level since 2013.

In 2013, only 50% of Americans could cover an expense of $400 in cash or its equivalent. In 2019, before the pandemic, this percentage was 63%. But surprisingly, that percentage hasn’t decreased as a result of the COVID-19 crisis — rather, it’s increased, at least at the end of 2021. Perhaps we can thank stimulus money for that.

Has inflation depleted Americans’ cash reserves?

Now, before we go any further, it should be noted that there may be additional data that paints a less rosy picture of Americans’ ability to cover a $400 emergency. Recent findings from YouGov show that only 51% of Americans could come up with $400 on a whim, compared to 68%.

These data are not contradictory. Data compiled by the Federal Reserve is based on November 2021 findings, while YouGov data is from May 2022. It could be that inflation has forced many people to spend their savings, leaving them with reserves of insufficient cash.

Because these two data sources are separate, it’s hard to make a definitive comparison between Americans’ ability to cover a $400 expense at the end of November versus now. So the takeaway should be that at the end of last year, more Americans were equipped to find $400 on the spot than in the past, whereas right now that might not be the case.

Is $400 enough for an emergency fund?

Most financial experts say it’s a good idea to have enough money in savings to cover at least three months of bills. And so based on that, it’s fair to say that $400 isn’t close to cutting it for a full emergency fund.

So those who don’t have much more than $400 to their name should make an effort to increase their savings. Of course, this is not an easy thing to do at a time when inflation is soaring. But a silver lining in these tough economic times is that the gig economy is booming, so it may be easier than ever to get out there and take a side hustle. This additional income could help stimulate savings.

Spending cuts should also help increase savings balances. Some people, however, can already live very frugally with little or no spending to cut. But those who do have some leeway should re-evaluate their spending habits and try to save money where possible.

The reality is that a financial emergency can happen to anyone at any time. And it’s important to be prepared for an expense that exceeds the $400 mark.