Market Digest

Half US Consumers Are Unable To Raise Emergency Funds And 85% Are Unable To Answer Three Basic Risk Questions

Half of all US consumers would struggle to meet an unexpected financial crisis like sudden car or home repairs or minor health related expenditures according to the TNS Personal Risk Assessment and Risk Literacy Survey. US consumers also lack a basic understanding of financial risk.

The TNS Finance Personal Risk Assessment and Risk Literacy Survey is a consumer survey developed by TNS in association with professors from Harvard Business School and Dartmouth College. The survey analyzes nationally representative consumers across thirteen countries with respect to their risk literacy, household financial fragility, and financial experience and behavior during the economic crisis of 2008-2009.

No Financial Safety Net

To measure capacity for risk bearing, the survey probed if consumers could come up with enough money for a major car repair in a month. 46% of US consumers were unlikely to be able to find the funds. Younger people had the most difficulties with 55% of 16-24 year olds compared too 34% of 55-64 year olds unable to fund emergencies. Financial fragility directly correlates with salary levels however 24% of those earning $100,000-149,999 would still unable to find funds.

According to Peter Tufano of Harvard Business School, “These figures include more than just the unemployed or lowest income households. There is widespread financial fragility with a significant number of seemingly middle-class consumers extremely vulnerable to sudden financial emergencies.”

Where to turn for help? Savings, credit or social networks?

While credit cards are ubiquitous, households don’t expect to turn first to credit for emergencies. 49% of Americans would look to savings accounts first to fund an emergency. 27% said they would likely turn to their families for help and 21% would try to work overtime or get a second job. 20% would look to credit cards to tide them over in emergency – 18% are prepared to sell their belongings (not home).

Risk Literacy

After a financial crisis where risk was such an enormous factor, it is important to know if consumers have any real understanding of the basic principles of financial risk. TNS asked consumers to assess: the relative payout of two lotteries, the relative risk and returns from two investment funds, and the relative risk of investing in a single versus a basket of stocks.

In the US, respondent scores were higher than many country results but still very poor. Only 19% of men and 11% of women surveyed managed to answer all questions correctly (15% in the aggregate). The ability to answer these questions is related to general education with only 8 percent of high school graduates able to answer all questions correctly. However, even the highly educated didn’t fare well with only 20% of those with a college degree and 30% with post-graduate degree able to answer the three questions correctly.

The older population – where people are more likely to be actively invested – also struggled with risk concepts. Only 12% of 35-64 year olds compared with 33% of the under 35s for all countries surveyed were able to answer the questions.

Trish Dorsey, SVP TNS Financial Services, sees an opportunity – and a real challenge – for the financial community to become engaged in educating consumers, “We think these data speak to a real need for financial services providers to develop simple solutions communicated with great clarity and empathy. In fact, we see many of our financial clients already developing educational materials to help their customers make more informed decisions about managing risk. It’s a possibility that even the most well educated consumers, particularly women, may just disengage because they are too afraid to invest in products they cannot understand.”

Source: TNS