Half of Americans are “Financially Fragile” – How Not to be One of Them

A disturbing article from the Wall Street Journal reports that Nearly Half of Americans Are ‘Financially Fragile’, which is defined in the article as households who “definitely or probably couldn’t come up with $2,000 in 30 days.”

The $2,000 figure was chosen because it’s roughly the cost of “an unanticipated major car repair, a large co-payment on a medical expense, legal expenses, or a home repair”—in other words, expenses that are hardly out of the question for a typical household.

According to the article 46.5% of all respondents are living very close to the financial edge—in other words, nearly half of America.  And it’s one of the worst rates in the world—in Italy for example, the rate is only 20%.  But it gets even worse; an additional 25.1% of U.S. respondents answered that they were “probably able” to come up with $2,000—meaning that they aren’t entirely sure.

That’s a sad state of affairs no matter how you interpret it.

How should we respond to this information? By making certain we don’t fall into the same category!

How do we become financially fragile?

The first way to avoid financial fragility is to understand how you can get into that position in the first place.  The rocky state of the economy in the past few years has certainly pushed many household into some level of financial distress, and that’s not entirely within our control.  However, there are other lifestyle factors that have contributed that are very much within our control:

  • Living above your means.  This is the major cause of financial problems in many households.  The only way to accumulate savings is to live beneath your means and bank the difference.  Not enough people do that these days.
  • Perpetual “crisis management” toward finances.  There’s no preparation for potential problems and each one that comes up creates a crisis that’s met with eleventh hour solutions.  A similar lack of preparedness greets each new crisis.
  • Excessive optimism.  America is nothing if not an optimistic country.  We assume tomorrow will always be better, but the Achilles heal of that sunny view is that it can leave us unprepared when our rosy assumptions don’t pan out.
  • No emphasis on savings.  We live in a consumer driven economy where the name of the game for many is simply to live well.  That lifestyle can leave little room or even perceived need for savings.
  • Using debt as savings.  Some of the people considered to be financially fragile have substantial assets, but none of it is liquid.  Home equity and retirement plans may be excellent asset accumulation vehicles, but they aren’t cash in a crisis.  Liquidity is important no matter what your financial status in life may be

How to stop being financially fragile

Debt trapThe way to avoid being financially fragile is to address any of the conditions above—or any other factors in your life—that may be interfering with your ability to save money.  Every household should have some savings—at least a few thousand dollars to put out financial fires.

Start a crash savings program.

Commit to getting some money into a savings account within a short space of time—30, 60 or 90 days—what ever your capabilities will allow.

Sell a bunch of little things, sell a couple of not so little things (car, jet ski, motorcycle or what ever you can), take a part time job for a while, bank a bonus or an income tax refund—do what ever it takes to raise some cash in a hurry.

Elevate the effort to the level of a crisis itself; if you have no savings of any kind then you already are in crisis.  Since just getting started is the biggest obstacle to building savings, quick action and results will be critical.

Bring your cost of living down below your income.

If your crash savings program enables you to put a couple thousand dollars into your savings account quickly, you can take this step more gradually.  Set workable goals—lower your expenses just 5% for the first three months, then increase it to 10% for the next three.  Be sure to bank the difference and in doing so, you’ll gradually create a savings habit—you want to make saving a part of your financial lifestyle.

Stop borrowing.

For most people, building savings while paying off debt will be too much to handle at once.  Better to make saving the priority so you can have a ready cash reserve that will make borrowing unnecessary in the future.

In the meantime, just make the scheduled payments on your loans and don’t add any new debt.  You’ll be in a better position to pay off your debts once you have a fat savings cushion.

Simply learning to live without borrowing can increase the importance of savings.

Have different types of savings.

An emergency fund should be established for its true purpose—which to sit and do nothing but collect interest until it’s needed in a crisis.  But that’s not enough.  There needs to be a second level of savings for large, predictable expenses, such as the replacement of a car or the upcoming family vacation.

Investments should make up the third tier—retirement assets and other long term investments.  In this way you’ll be preparing for short, medium and long term financial needs which will enable you to better anticipate financial problems, rather than just reacting to them as they happen.

As with all other types of change in life, the key is to take action and to continue until the new effort become blended with the rest of your life. The sooner that’s done, the sooner you’ll be off the financial edge and in position to move onto something better.

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Published or updated December 6, 2012.


  1. I have a couple different “Savings” that serve different purposes but really helped me out once I established them.

    – Emergency Savings
    – Christmas Fund (on my own I would probably not save up much for Christmas, but my dad is a very traditional farmer and I don’t think he’d enjoy the holidays as much if it wasn’t more traditional, so I plan head for it for him)
    – Periodic Savings Fund (for all my quarterly/yearly expenses like car insurance, or if I need to save up for new tires before winter)
    – Mortgage Savings (to transfer my mortgage payments to each paycheck since I pay half out of one paycheck and half out of the other. This way I know this money is never touched)

    I use ING so these are very easy and low-maintenance to set up.

    • ING Direct is awesome for their ability to make sub-accounts. We’ve used that as well to save for different things.

      I like how you have your savings separated. When you have different categories, you’re making sure you aren’t raiding your general savings when you spend. With a category you have a set amount you can spend (of course you can violate this easily but the sub-accounts give you a mental barrier to the rest of your funds).

  2. Graham Lutz says:

    It’s much easier to become financially fragile than it is to become financially secure. If you’re not paying attention, the default way to be is fragile.

    • When you don’t pay attention to where your money is going and you don’t make the conscious decision to save, then it is easy to be financially fragile.

      But if you put an effective plan in place, it’s easy to make sure you have emergency savings for when you need it.

  3. No Debt MBA says:

    I definitely agree that living above your means and not saving are the two (linked) core reasons many Americans are financially fragile. As a society we can invest in financial education, but I imagine that it would take a very long time to see improvement (same for obesity and health education). Think about how long and how much money the government invested in campaigns, research studies and outreach to inform the public about the negative health effects of smoking. We’ve been investing in it for decades but only in the last decade has it really dissipated.

    • When you look at smoking, I don’t think big gains were made in stopping it until smoking was actually made illegal in certain areas. Not that we should make consumption of goods illegal, just saying it wasn’t until the government was real serious about change did anything really start top happen. It can’t be “do as I say, not as I do.”

  4. The numbers are quite similar in Canada where we are all being warned about a potential housing market correction/crash when interest rates inevitably climb back up. Something like 1/3 of Canadians wouldn’t be able to handle an increase of $200/month in their mortgage payments, which is scary.

    • Ughh, that is terrifying that 1/3 of Canadians would be in trouble with a $200/month increase.

      So many are living right on the edge (I’ve been there). I remember a landlord who raised my rent something like $20-$50 bucks one year and I almost had a heart attack. I was just getting to where I was able to put away a little into savings.

  5. I think a major problem in our country is that so many people choose to stretch their finances in order to achieve a lifestyle or, in some cases, a perception of a lifestyle. Keeping up with the Joneses can send anyone into spiraling debt. You bring up a great point – always live below your means and save the rest. Doing your best to avoid living paycheck to paycheck and choosing to investing a bonus rather than using it for a down payment on a flashy sports car could mean the difference between retiring at 55 and retiring at 70.

    • Well said. The treadmill of consumption is a slippery one. Emergency funds are essential and being able to differentiate between needs and wants is too. People need to stop caving to marketing and realize their ploy before they too become one of the “fragile” statistics.

      • And here’s the thing – We are encouraged to spend because a major measurement of our economic growth is GDP, which gets bigger the more we buy. It’s a slippery slope indeed!

        Maybe instead of GDP, we need a type of credit score? It’s not enough to just produce a lot. We need to be producing such that we aren’t using all available credit at the same time.

  6. Really, it’s just about being responsible. If every month you spend a little less than you make, you build savings and comfort, and you reduce debt and stress.

    • It’s a simple equation, isn’t it? But so many of us find it hard to follow. We’re an “I want more/the biggest/the latest” society. We measure ourselves on what those around us are doing, regardless of the situation behind those other people.

  7. …and the $2K was just the half of it. the study had other grim statistics like what people actually do with their money, how little they understand, reliance on high interest debt, etc. I’d written about it last week and didn’t even know where to start or what to focus on it was so grim; I suppose WSJ focused on the $2K, but it’s abysmal overall. It’s going to be pretty bad when the boomers hit retirement years; the country’s aging and approaching some real fiscal difficulties.

    • How do you think we can get back to financial integrity as a society? It does seem bad at times and it’s definitely a wonder how some are going to be able to support themselves in their later years (I’m certainly worried).

  8. It’s pretty scary to see so many people living on the edge. Without savings, one or two unexpected expenses can be absolutely devastating.

What Do You Think?