Study Reveals Soaring Unexpected Expenses for Consumers

In a recent study, Alia Dudum, a money expert with LendingClub, sheds light on the increasing burden of unexpected expenses on consumers. The study suggests that the Federal Reserve’s long-standing benchmark of $400 for emergency expenses, which has remained unchanged for a decade, is no longer an accurate reflection of consumers’ financial well-being. Dudum emphasizes that the benchmark fails to account for inflation over the past ten years and the macroeconomic volatility brought on by the pandemic.

The study reveals that a significant portion of unexpected expenses exceeds the $400 benchmark, with two-thirds of consumers facing expenses that cost more than this amount. In fact, 41% of consumers reported spending double or more than the benchmark. Dudum highlights that the average cost of unexpected emergencies faced by U.S. consumers is around $1,700. This suggests a false sense of security among consumers, leading them to believe they have sufficient savings or available cash to cover such expenses.

Dudum raises concerns about the frequency and rising cost of unexpected emergencies and questions whether consumers have adequately prepared themselves for the future. As unexpected expenses become more prevalent and expensive, relying on past saving levels may prove insufficient to navigate these challenges effectively.

The study also examines why people struggle to save for emergencies and whether this challenge stems from living paycheck to paycheck. Dudum notes that while the proportion of consumers living paycheck to paycheck and those facing emergency expenses has remained relatively constant since July 2022, the average cost of these expenses continues to rise, showing a 16% increase compared to the previous year.

For instance, from July 2022 to May 2023, the average cost of vehicle repairs increased by approximately $260, health-related occurrences rose by around $100, unexpected high bills or taxes surged by over $1,000, and house-related issues or relocations grew by about $150. Dudum explains that an individual’s financial situation, along with the cost of the repair, determines their ability to pay for these expenses. The study found that 51% of consumers paid with cash or savings, while 33% used financing or alternative sources, and a smaller percentage relied on credit cards or installments.

Furthermore, the research explores how age influences preparedness for unexpected expenses. Dudum reveals that nearly half (46%) of consumers have faced unexpected emergencies, with millennials and high-income individuals experiencing them at higher rates. Affluent consumers who own vehicles and homes encounter these expenses more frequently, as repairs and replacements are often necessary. Consumers earning over $100,000 annually were 34% more likely to face unexpected expenses compared to their lower-income counterparts. Dudum emphasizes that inflation contributes to an increase in the average emergency spend, surpassing the Federal Reserve’s $400 benchmark.

To better prepare for unexpected financial needs, Dudum offers several steps individuals can take. First, she suggests building and regularly fueling an emergency fund, aiming to save at least three to six months’ worth of living expenses. Additionally, prioritizing debt reduction, particularly high-interest debts like credit cards, is crucial. Dudum advises paying off the full balance each month to avoid revolving debt. Exploring opportunities to enhance savings, such as high-yield savings accounts with attractive annual percentage yields, can also be beneficial. Finally, reviewing insurance coverage, including health, homeowner’s or renter’s, and car insurance, is essential to ensure adequate protection for emergencies.

As the study highlights the increasing financial burden of unexpected expenses, it emphasizes the importance of proactive financial planning and preparation. By taking these steps, individuals can better safeguard themselves against unforeseen emergencies and improve their overall financial resilience.