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Several years after the financial crisis, financial fragility is not only pervasive in the U.S economy but also prevalent among middle-income households. This highlights the need to consider more than asset levels in order to understand household financial resilience. In this paper, we explore the determinants of financial fragility for American households in the middle-income bracket (earning $50–$75K annually) using data from the 2015 National Financial Capability Study. We analyze the socioeconomic characteristics and balance sheets of these households with focus on their debt management and expenses. According to our empirical analysis, three main factors impact financial fragility of middle-income households: family size, debt burden, and financial literacy. First, because a portion of household financial resources are committed to children, family size plays an important role in financial fragility. Second, middle-income households have a lot of debt, and the data shows that debt increases with income. While middle-income households do own assets, they are highly leveraged. In addition, they are using high-cost borrowing methods to cope with emergency expenses. Third, financial literacy is very low among financially fragile middle-income households, which is potentially problematic when there are assets and debt to manage. Moreover, we find that financial fragility has long-term consequences, as financially fragile households are much less likely to plan for retirement.
Andrea Hasler is an Assistant Research Professor in Financial Literacy at GFLEC. She holds a Ph.D. in Finance as well as a M.Sc. and B.A. in Business and Economics from the University of Basel. Her dissertation was on households’ financial decisions and retirement planning. During her doctorate, she spent two years at NYU Stern conducting research. Moreover, she has been teaching for five years as a lecturer at the University of Basel. Her previous professional experience includes the development of an advanced studies online course in financial market theory and the provision of global equity market research as research analyst.
Annamaria Lusardi is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business (GWSB). She is also the founder and academic director of GWSB’s Global Financial Literacy Excellence Center (GFLEC). Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College, where she taught for twenty years. She has also taught at Princeton University, the University of Chicago Harris School of Public Policy, the University of Chicago Booth School of Business, and Columbia Business School. She holds a PhD in Economics from Princeton University and a BA in Economics from Bocconi University.
*This working paper was made possible by the US 2050 project, supported by the Peter G. Peterson Foundation and the Ford Foundation. The statements made and views expressed are solely the responsibility of the authors.