How Does Liquidity Affect Consumer Payment Choice?
The financial industry typically recommends that consumers have enough liquid savings to cover at least three to six months’ worth of expenses. However, the data show that the majority of US households are not prepared to handle financial emergencies. Indeed, using a recent representative survey of US consumers (the 2017 Diary of Consumer Payment Choice), the author shows that 25 percent of consumers have not saved any money for emergencies.
Emergency savings is an important topic in the literature on consumer financial decision-making, but a link to payment choice is missing. This paper adds to the discussion by analyzing how consumers’ emergency savings, or lack thereof, relate to their payment behavior. In particular, it focuses on credit card use and borrowing by consumers who have little or no emergency savings, people who are sometimes characterized as financially fragile.