Most households can weather a $400 financial shock, research finds — but some have to get creative

Higher prices have made it more difficult for Americans to stretch their paychecks.

Yet new research finds a bright spot: Most households have enough liquidity to cover “moderate expense shocks,” according to a recent JPMorgan Chase Institute analysis of a sample of 5.9 million households through anonymized banking data.

“We hear questions all the time like, ‘Are people living paycheck to paycheck?'” said Chris Wheat, president at JPMorgan Chase Institute.

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One question — whether Americans can handle an emergency $400 expense — is a typical gauge of household liquidity, he said.

The Federal Reserve has found 13% of all adults would have been unable to pay for an unexpected $400 expense in 2023.

Yet JPMorgan Chase Institute finds the share of individuals who are unable to cover such an expense is lower — just 8% — when considering a combination of available cash, disposable income or short-term credit. The share of households that could not weather a $400 emergency expense stayed the same through 2022 and 2023, JPMorgan Chase Institute found.

The research finds a higher level of financial resiliency than what shows up when only considering cash reserves, and notes that access to affordable credit can help.

Most families — 92% — can cover a $400 “expense shock” through a combination of cash savings, disposable income or short-term credit, JPMorgan Chase Institute finds.

That includes 67% of households that can cover the expense using all cash savings; another 20% that can cover it with a combination of cash and disposable income; 3% that can use cash, disposable income and a credit card without incurring interest; and 2% that would use cash, disposable income and a credit card that can be paid off within three months.

Yet turning to credit to handle even a short-term cash crunch can contribute to long-term debt.

For that reason, financial advisors recommend building a cash cushion against emergencies.

“There’s good debt and … there’s bad debt,” said Ted Jenkin, a certified financial planner and the CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta.

“But to me, almost all debt, maybe with the exception of having a long-term mortgage, is bad debt,” said Jenkin, who is also a member of the CNBC FA Council.  

Building an emergency cash reserve — which experts say should be at least three to six months’ of living expenses — can be tough. But there are tips that can help.

• Apply the rule of thirds to extra income. Every time you get a pay raise or bonus, one-third of that extra money will go to taxes and one third can go to enjoyment. But the remaining one-third should go to savings, by either paying off credit card debt or building an emergency fund, according to Jenkin. “This is really what will help people never get in trouble,” he said.

• Put away extra paychecks. Most people are paid on a bi-weekly schedule, which means in two months of the year, they receive three paychecks. “Bank that third paycheck in your savings account for an emergency reserve,” Jenkin said, which will go a long way to help “normalize” your finances.

• Clean out your gift cards. Many people have unused gift cards, which can be turned into cash at sites like Raise or CardCash, Jenkin said. The exchange likely won’t be dollar for dollar. But trading those unused cards for cash can help you build up your emergency reserves, Jenkin said.