The smart money is in cash? Financial literacy and liquid savings among U.S. families |
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| Institution: | 1. Federal Reserve Board, United States;2. Cornell University, United States;1. Department of Accounting, Deakin Business School, Deakin University, Level 3, Building LB, 221 Burwood Highway, Burwood, VIC 3125, Australia;2. Department of Accounting, Monash Business School, Monash University, Level 3, Building H, 900 Dandenong Road, Caulfield East, VIC 3145, Australia;1. Faculté de Droit, des Sciences Économiques et de Gestion (ARGUMans), Le Mans Université, Le Mans, France;2. COMSATS University Islamabad, Vehari Campus, Islamabad, Pakistan;3. Emlyon Business School, 23 Avenue Guy de Collongue, Écully, France;4. NEOMA Business School, 1 Rue du Maréchal Juin, 76130 Mont-Saint-Aignan, France;1. Center for Gender, Leadership, and Inclusion, Cranfield University School of Management, United Kingdom;2. Department of Business Administration, University of Cyprus, Cyprus;3. Department of Accounting and Finance, University of Cyprus, Cyprus;1. Monash University, Australia;2. The University of Hong Kong, Faculty of Business and Economics, Hong Kong;3. Nottingham University Business School China, China;4. West Texas A&M University, Canyon, TX, United States |
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| Abstract: | Most financial advisors recommend storing three to six months of expenses in liquid assets in case of an emergency. Yet we estimate that more than half of U.S. families do not have at least three months of their non-discretionary expenses in liquid savings. We find that financial literacy is strongly predictive of having three months of liquid savings, controlling for income, income variability, and even parental resources. We also find that financial literacy predicts liquid savings across the income distribution. These results indicate that accumulation of an emergency fund is not simply a function of income. Finally, financial literacy is predictive of liquid savings even among high illiquid wealth households. This suggests that the phenomenon of “wealthy hand-to-mouth” families may reflect financial mistakes rather than portfolio optimization. Our paper highlights the importance of financial knowledge in explaining families’ preparedness to deal with unexpected expenses or disruption in their income. |
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