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A couple of economists at the Federal Reserve Bank of St. Louis have published an article predicting which Americans are likely to suffer most, financially speaking, from the COVID-19 pandemic. It turns out that households that had the weakest balance sheets to begin with are the ones that are most vulnerable to economic shocks.
Well, duh.
Still, the article by Ray Boshara, director of the St. Louis Fed’s Center for Household Financial Stability, and Lowell R. Ricketts, the center’s lead analyst, does contain some specific predictors that I found educational.
As we should all realize by now, financial vulnerability does not depend entirely on the amount of money flowing in, although more income certainly makes financial security easier. According to Boshara and Ricketts, the single biggest predictor of falling into serious delinquency (which they defined as being at least two months behind on a current loan obligation) is failure to have at least two months of income socked away in safe assets.
And who doesn’t have two months of income in ready cash? Most Americans. Even some of you who read Arkansas Business. (I know these things.)
Last fall, JPMorgan Chase’s research division issued a report suggesting that households need at least six weeks of take-home pay as a financial cushion. “The recommendation, based on an analysis of millions of Chase checking accounts, is considerably less than the traditional rule of thumb of three to six months of take-home pay,” The New York Times reported. “But even so, most households fall short, the report found: About two-thirds lack the recommended buffer.”
And that was back before the pandemic. Before tens of millions of Americans were suddenly out of work because their employers couldn’t open or lost significant revenue. According to Chase, a middle-income family would need at least $5,000 in a rainy-day fund but had, on average, about $2,000. Lower-income households need $2,500 but have just $700.
No wonder, then, the first thing most people seem to have done when the reality of the pandemic started to hit home was to preserve cash. Americans saved almost a third (32.2%) of their disposable income in April, according to the U.S. Bureau of Economic Analysis, the highest by far in the more than half-century that the bureau has tracked that metric.
The savings rate in March was 12.7%, and it settled back to 23.2% in April, according to the BEA. Why? April was when most households received pandemic stimulus checks from the federal government, and it looks as if people who weren’t already in arrears decided, smartly, to save it. Who could afford to do that? The households that were already in the best position financially, of course.
(This is true of businesses as well. For cash-starved companies, forgivable Paycheck Protection Program loans helped avoid immediate insolvency. For companies with money in the bank, the PPP preserved cash and created some breathing room.)
Having less than two months of income in savings, according to the St. Louis Fed guys, triples the likelihood of a household falling behind on its bills. But here’s something that surprised me: Failing to save is actually riskier than being too highly leveraged. Having debt payments that exceed 40% of income merely doubles the risk of serious delinquency.
Other risk factors: poor health and too many dependents. “Families providing financial support to relatives or friends were 41% more likely to fall at least two months behind,” Boshara and Ricketts wrote. “In addition, each child in the family increased the likelihood of a serious delinquency by 17%.”
While young adults (under age 40) and the middle aged (40-61) are only slightly more likely to fall behind on their bills, older Americans “are 61% less likely than middle-aged Americans … to experience serious delinquency.” This is as it should be. With more years to amass assets and to dispense with financial obligations, like kids and mortgages, seniors are more financially resilient.
All this talk of savings reminds me to congratulate Sarah Catherine Gutierrez, founder of Aptus Financial in Little Rock (which manages Arkansas Business Publishing Group’s retirement plan). Her book, “But First, Save 10: The One Simple Money Move That Will Change Your Life,” will be published this month by Et Alia Press of Little Rock. It’s aimed at young women, but saving more is good advice for all of us.
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