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Why Americans aren’t good at rebounding from financial emergencies — and how you can get better

Are American families becoming more financially resilient? Hardly.

A new report from Pew Charitable Trusts found what many economists already know: many American families struggle to make ends meet when facing a financial shock.

“It does not come as a surprise,” George Washington University economist Annamaria Lusardi said of the study, released earlier this month.

Last year, the Federal Reserve reported that 46 percent of Americans would not be able to cover a $400 emergency expense or that they’d have to sell something or borrow money to do so. The Fed’s report in 2015 found that 47 percent would have a hard time coming up with such an amount.

READ MORE: Can you guess how many Americans have absolutely no savings at all?

As Making Sen$e reported last summer, 66 million Americans have zero dollars tucked away for an emergency expense.

And while we would hope that Americans’ financial resiliency has improved since the Great Recession, Americans’ ability to weather financial shocks hasn’t changed much. While the Fed has only been asking about emergency expenses for a few years, a similar survey by Lusardi and her co-authors looking at financial resiliency during the Great Recession found that in 2009, a quarter of Americans would simply not be able to come up with $2,000 in 30 days if need be. Another 19 percent would have to sell something, borrow money or turn to payday loans. The report concluded that nearly half of American families were financially fragile.

What does the Pew report find?

The new report from Pew, which looked at data from 2014 to 2015, found that while there was an improvement in families’ ability to weather a financial shock in that time period, it was slight — 53 percent of respondents still said it was hard to cover regular expenses after their most expensive shock in 2015, a mere 3 percent decrease from 2014.

(A financial shock is defined by Pew as any unexpected expense, such as a reduction in income due to job loss or hours cut, car repairs or trips to the hospital.)

The most expensive financial shock typically costs a family $2,000. Unsurprisingly then, “the data show that households with savings were more resilient,” said Clinton Key, a research officer for Pew’s financial security and mobility project.

Clearly, savings matter. So much so, in fact, that households with incomes below $25,000 but $2,000 in savings on hand were as financially resilient as those with incomes between $25,000 and $84,999 with less than $2,000 in savings.

But even savings can’t save families from financial hardships.

Perhaps the most striking finding of the report was that half of the respondents who did have $2,000 in savings on hand in 2014 still struggled to make ends meet after financial shocks in 2015.

READ MORE: Poverty makes financial decisions harder. Behavioral economics can help

“The Pew research shows us that people with savings are more likely to be resilient in the face of emergencies, but it isn’t a panacea,” said Rachel Schneider, author of “The Financial Diaries” and an external reviewer of the report.

So what’s going on? Why are families with savings on hand unable to comfortably weather a financial shock?

Having just enough money to cover a single financial shock is not enough.

“Our mental model about saving for emergencies isn’t accurate,” Schneider said. “We think that emergencies are rare, and the fact is that we have to use that emergency money pretty regularly.”

Indeed, more than half of respondents experienced a financial shock in 2014. The same was true for 2015. It’s hard to keep $2,000 (the typical cost of a family’s most expensive financial shock) in an emergency fund when you are regularly having to pull from that fund.

“Financial well-being is not a permanent state that households achieve and then they’re fine,” Key said. “They ebb and flow.”

Key pointed to a link between the two years that might be able to explain the frequency of emergency expenses: Seven in 10 families that experienced a shock in 2014 also experienced a financial shock in 2015.

How families with a 2014 financial emergency fared in 2015

“We were surprised by the strength of the correlation between experiencing a shock from 2014 to 2015,” Key said. “One possibility is that the shock in 2014 hasn’t been completely been resolved.” He compared it to his neighbors’ leaky basement, which they spent money to fix last year only to see it flood again this year — which means more money for another fix.

What’s causing financial shocks?

Having a car was a major indicator of a financial shock, with 60 percent of 2014 car owners experiencing a financial shock in 2015, compared to 37 percent of non car owners.

As Helaine Olen and Harold Pollack aptly put it in their personal finance book, “The Index Card,” car repairs can be an “unexpected expected expense.” As they ask in their book, “do you know anyone who has ever had a car that didn’t break down?”

Households with 2014 trait followed by 2015 shock.

One of the biggest expenses — and one likely to repeatedly dog a family’s finances — was health expenses. One in five families made an unexpected trip to the hospital in 2015 due to illness or injury; the median household whose most expensive shock was health related spent $3,000 on those health costs out of pocket, Key said.

Perhaps unsurprisingly, then, the personal finance website NerdWallet has repeatedly found that medical bills are the leading cause of personal bankruptcy.

What can American families do to become more financially resilient?

Saving more than $2,000 — the typical cost of families’ most expensive shock — is a first step. But how do you do that?

“Build automaticity,” Key said. In other words, make savings automatic.

Siphon off a portion of every paycheck to a savings account — ideally between 10 to 20 percent of your income, Olen and Pollack recommend. You can make this automatic by talking with your HR department and having a portion of your paycheck go directly to a savings account or by talking with your bank and having a set amount from your direct deposit paycheck moved over to your savings account. (You can read more here about how to create a savings plan that really works.)

READ MORE: How to create a savings plan that really works

Then there are apps like Digit, that will analyze your spending and see where you can save money. The app will then automatically transfer small amounts of money from your checking account to the Digit savings account on a daily basis.

But even if 10 percent of your income is a tall ask, set something — anything — aside for a rainy day on a regular basis.

“We as humans underestimate risk,” Schneider said. “Families should be conservative as they can be, saving as much as they can.”

The fact of the matter is that while we may not know what emergency will fall on us, when it will come down the road or how much it will cost, we should expect it will come.

Know yourself

“The people in our studies that were the most successful in achieving financial health seemed to have self awareness about what strategies are going to work for them,” Schneider said, referring to the Financial Diaries studies she and her co-author Jonathan Morduch conducted.

There was plenty of variation.

One man Schneider interviewed, Robert, put his money into what Schneider called the “Bank of Mom.” Yes, that’s right — he gave his money to his mother. “She’s like Fort Knox,” he said, explaining that his mother would only hand over access to his savings if he really needed it. Robert was saving for a security deposit and first month’s worth of rent, a total of about $1,600, on a salary of roughly $22,000 per year. With mom’s help, he succeeded in his savings goal.

Janice, another participant in the Financial Diaries, devised her own scheme. She purposefully didn’t order another checkbook when she ran out, cut up her checks and debit card and chose a bank that was an hour’s drive away, so it would make it harder for her to withdraw her money and spend it. A trip to a bank took planning, and Janice would have plenty of time to ponder whether she really needed the money before she made the trip.

Stability versus mobility

But the fact of the matter is that many Americans — even if they’re saving — are struggling financially.

“American families are resilient, but not because they are getting the help they need or deserve,” Schneider said. “We saw people repeatedly, optimistically get through financial traumas, [but] American families are having to draw on those wells of resilience far too much.”

It’s no wonder then that financial stability is so appealing to American families. When asked whether they would prefer financial stability or economic mobility, 92 percent of Americans said they would prefer stability, according to Pew, turning the idea of the American Dream — one of constant upward mobility — on its head.

Today, Americans dream of stability.