The Smart Money is in Cash? Financial Literacy and Liquid Savings Among U.S. Families

43 Pages Posted: 5 Jan 2022

See all articles by Neil Bhutta

Neil Bhutta

Federal Reserve Bank of Philadelphia

Jacqueline Blair

Cornell University

Lisa J. Dettling

Board of Governors of the Federal Reserve System

Date Written: November, 2021

Abstract

Most financial advisors recommend storing three to six months of expenses in liquid assets in case of an emergency. Yet we estimate that more than half of U.S. families do not have at least three months of their non-discretionary expenses in liquid savings. We find that financial literacy is strongly predictive of having three months of liquid savings, controlling for income, income variability, and even parental resources. We also find that financial literacy predicts liquid savings across the income distribution. These results indicate that accumulation of an emergency fund is not simply a function of income. Finally, financial literacy is predictive of liquid savings even among high illiquid wealth households. This suggests that the phenomenon of "wealthy hand-to-mouth" families may reflect financial mistakes rather than portfolio optimization. Our paper highlights the importance of financial knowledge in explaining families' preparedness to deal with unexpected expenses or disruption in their income.

Keywords: Financial Literacy, Savings, Liquidity, Household Wealth, Household Finance

JEL Classification: D14, D91, G50, G51, G53

Suggested Citation

Bhutta, Neil and Blair, Jacqueline and Dettling, Lisa J., The Smart Money is in Cash? Financial Literacy and Liquid Savings Among U.S. Families (November, 2021). FEDS Working Paper No. 2021-76, Available at SSRN: https://ssrn.com/abstract=3996999 or http://dx.doi.org/10.17016/FEDS.2021.076

Neil Bhutta (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

10 Independence Mall
Philadelphia, PA 19106
United States

Jacqueline Blair

Cornell University ( email )

Ithaca, NY 14853
United States

Lisa J. Dettling

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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