| Abstract: | We measure readiness to face emergency expenses using data from a representative survey of U.S. consumers. Our main findings are as follows: (1) there is substantial heterogeneity in financial readiness, with lowest‐income, least‐educated, unemployed, and Black consumers most likely to have $0 saved for emergency expenses; (2) the amount of emergency savings is correlated with payment choice: Less financially prepared individuals use cash more and credit cards less, compared to those with higher emergency savings; (3) while people with low emergency savings rely more on cash than credit cards, they revolve more debt, and so a financial shock is costlier for them; (4) changes in income from one year to the next do not appear to affect the likelihood of revolving on credit cards or increase the amount borrowed, although the data were collected before the COVID‐19 pandemic. For those with little or no savings and already financially vulnerable, even a temporary financial shock—an unexpected negative income shock (such as a layoff or a short‐term government shutdown) or an unexpected expenditure (such as a medical expense or a car repair)—could have severe financial consequences, exacerbated by the high cost of borrowing on credit cards. (JEL D12, D14, D15, E21) |
