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Rainy Day Funds Provide Cushion for Income Shock

Households without rainy day funds three times more likely to make a late mortgage payment

| BY Donald Liebenson

Households without emergency savings, or a rainy day fund, are more likely to experience mortgage payment problems in the event of an “income shock,” a new FINRA Investor Education Foundation study finds

These uncushioned households that experience an income shock are three times more likely than households with emergency savings to make a late mortgage payment, and almost twice as likely to be involved in a foreclosure.

One study FINRA cites notes that one-third of American adults ages 18 and over experienced a large and unexpected drop in income over a year-long period. These income shocks are not limited to job loss, but also a change in the family structure due to death or divorce or health issues. Paying a mortgage is just one of a number of financial strains these households face.

Late mortgage payments and foreclosures, beyond the obvious, have “long-term and far-reaching financial effects,” FINRA noted, including loss of access to credit and being charged higher interest rates. “For many households,” the report states, “their home is the most valuable financial asset they own, so behavior that undermines this asst is particularly problematic.”

While rainy day funds can less the blow of an income shock, most Americans lack this financial cushion. Another study cited in the FINRA report found that less than half of respondents surveyed reported they had set aside funds sufficient to cover expenses for three months.

Click here to learn more about rainy day funds.

Two-thirds of respondents indicated they currently have a mortgage. More than one-third (34 percent) of households that experienced an income shock reported making a late mortgage payment, compared with just 13 percent of households that did not experience a drop in income.

Similarly, five percent of households experiencing a dramatic drop in income were involved in a foreclosure vs. just 1.7 percent of households who did not.

The report does not address some issues raised in the report. For example, the duration and severity of the loss in income the respondents experienced is not known. Nor is it known what other resources to which these households have access, such as family and friends, or raising money by selling possessions.

But the findings do reinforce the conventional wisdom that rainy day funds can help mitigate financial problems. Efforts to increase financial literacy, too, recommended, as individuals with the most financial knowledge are most aware of how delinquent payments could impact credit scores and are better at sticking to their household budget.



About the Author


Donald Liebenson

dliebenson@millionairecorner.com

Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.  

A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.