Why the Fed Underestimates the Pressures of the Paycheck-to-Paycheck Economy

Amber Carroll, senior vice president of membership and lifecycle strategy at LendingClub, told PYMNTS that the Federal Reserve’s long-quoted stat on financial well-being could use a freshening up.

As has been widely reported through the years, the Fed has said that a significant percentage of U.S. consumers could not and cannot afford to handle a $400 emergency expense — roughly a third of consumers would struggle to make that payment using cash or a equivalent.

The $400 number, she contended, “is digestible.” It’s a number the Fed has been using for roughly a decade — a simple benchmark. But it has not kept up with the times.

“Inflation and macroeconomic volatility,” Carroll said, “have moved the needle.”

That $400 figure, she said, pales in comparison to the $1,700 that joint research from LendingClub and PYMNTS found is a more accurate reflection of the actual reality of our financial times and our financial pressures. In fact, the data shows, as Carroll related, that two-thirds of unexpected expenses cost more than the Fed’s preferred measure.

Millennials are facing emergency expenses at higher rates. Even high-income demographics are not immune. Consumers earning more than $100,000 annually were 34% more likely to have faced emergency expenses than their lower-income counterparts.

That might seem paradoxical, but as Carroll noted, the expenses stem from two avenues: The people that these higher-income earners are responsible for — their family members — and the things they own.

“They may be caring for children and their parents. They may be homeowners and have more vehicles,” said Carroll, who noted that a millennial might conceivably have college-aged kids and have elderly relatives living in the same household.

For the paycheck-to-paycheck consumers, Carroll said, the pressures wind up creating a chain reaction.

“The higher cost of living and a greater number of incidents where there are unexpected expenses eats into savings,” she said reducing the cash cushions that handle those expenses.

Consumers, as a result, modify their behavior. They wind up putting off larger purchases, pulling back on discretionary spend, looking for opportunities to reduce their expenses — or to supplement their incomes. In many cases, as the data shows, they are postponing nonessential vehicle- or housing-related repairs and purchases.

Eating Into Savings

“But if the emergency expenses eat too much into their savings, they may have to use debt to cover those expenses,” she said. The Fed’s latest tallies on credit card balances have touched roughly a trillion dollars.

In the meantime, financial goals get pushed out or even abandoned.

“It’s important to find a balance between emergency savings, debt repayment, and long-term goals,” she said. That entails a consistent refining of financial strategies and approaches as life goes on — and situations change — so consumers can mitigate unexpected expenses without completely derailing their overall financial progress.

Financial agility may entail what Carroll said involves making tradeoffs. Automated and data-driven aids — through platforms such as LendingClub — can help consumers bulk up their savings, or pay off credit card debt through a consolidated loan. LendingClub offers a high-yield savings account where the APY is 4.50%.

“Setting automatic sweeps into that account, regularly, can do a lot — because every little bit helps,” Carroll said, “and you can weather those expenses without leaning too heavily on high-cost debt.”