UPDATED: February 20, 2023

Excessive household debt was crucial in explaining the severity of the Great Recession. So where are we now? Have households strengthened their financial position since 2009? Are household balance sheets strong enough to prevent another massive pull back in spending if there are significant job losses?

To answer to these questions, we look at evidence from the 2012 National Financial Capability Study by FINRA. (We are grateful to Annamaria Lusardi, an expert on financial literacy,  for pointing us to the data used in this post.) This survey is a representative sample of 25,000 individuals who were asked mostly qualitative questions about their finances. The survey was put into the field three years after the worst of the Great Recession.

The survey responses are shocking, and should put fear into all of us about the financial vulnerability of U.S. households.

The survey asks the following question: “How confident are you that you could come up with $2000 if an unexpected need arose within the next month?” Here are the answers:

Survey on emergency funds

Almost 40% of individuals in the United States either could not or probably could not come up with even $2000 if an unexpected need arose.

Another question asks: “Have you set aside emergency or rainy day funds that would cover your expenses for 3 months, in case of sickness, job losses, economic downturn, or other emergencies?” Here the answers:

3 months emergency fund survey

In 2012, almost 60% of individuals in the United States did not have three months of emergency funds that they could access to cover an emergency. The majority of U.S. households do not have the buffer they need to help them survive through such shocks.

Households also report that they have too much debt, and aren't able to quickly eliminate debt. Here are answers to the question: “How strongly do you agree or disagree with the following statement — I have too much debt right now”. The answers are on a 1 to 7 scale, with 1 being “strongly disagree” 4 being “neither agree nor disagree”, and 7 being “strongly agree”.

Do you have too much debt survey

More than 20% of individuals “strongly agree” that they have too much debt. If we add people who at least somewhat agree with the statement, then over 40% of households believe they have too much debt.

So households are extremely vulnerable to shocks, and many have too much debt. Are these two patterns related? The answer is unequivocally yes. Here is the easiest way to see it. If we isolate the sample to individuals who say they do not have three months of emergency funds in savings, and then we see how many of these individuals say they have too much debt, we get a clear picture of what is going on. (Here we group answers 1-3 on the debt question into “disagree”, and 5-7 into “agree”):

Do you have too much debt for those that do not have emergency funds

As the chart shows, the grand majority of people who say they do not have emergency funds also say they have too much debt. We keep the vertical axis in terms of the overall population, not just those that do not have emergency funds. So as you can see, 35% of individuals both have too much debt and do not have three months of reserve funds in case of an emergency.

Remember that debt increases the vulnerability of these individuals. If they lose their job, they will still owe interest payments on their debt. Debt doesn’t disappear just because your income does.