Connecting some research “dots” suggests that may be the case.
A recent Bankrate.com survey says that 40% of respondents or their immediate family ran into a major unexpected expense last year.
That’s a problem since most Americans (63%) don’t have enough budget-cushion or savings to cover an unexpected $1,000 expense (think, medical bill, house or car repair).
According to the poll, only 37% said they would be able to take the money directly from savings; the rest said they would try to cut expenses (24%), use their credit cards (15%) or borrow money from friends & family (15%). About 1 in 10 had no idea what they’d do.
Predictably, those with higher incomes were most likely to say they would be able to tap savings for emergencies or divert some discretionary spending.
75% of people in households making less than $50,000 a year and 2/3s of those making between $50,000 and $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill.
Even for the wealthiest 20% — households making more than $100,000 a year — more than 1 in 3 say they would have some difficulty coming up with $1,000. Source
Obviously, the threat of a large, unexpected expense is emotionally daunting to most Americans.
“It definitely adds stress to everyday life. It hangs over you.”
To make matters worse, there is some evidence that the financial stress may impair “cognitive functioning” – that is, dent a person’s IQ.
In his book Mindware, psychology Prof. Richard Nisbett channels an “impressive series of experiments conducted by the economist Sendhil Mullainathan and the psychologist Eldar Shafir.”
The experiments reveal that “resource scarcity” – e.g. not having enough money to cover living expenses –can have dire consequences for cognitive functioning.
In one of the “impressive experiments”, people were given an IQ test and then asked to imagine how they would rejigger their budgets if they suddenly were confronted with the need for an expensive auto repair .
Then they were given a follow-up IQ test.
The good news: A hypothetical unexpected expense of “a couple of hundred dollars” didn’t impair the IQ test performance of either poor people or “well-off” people.
And, for well-off people, IQ was unaffected even if the unexpected expense ran over $1,000.
The bad news: If the the unexpected expense ran over $1,000, “the IQ of poor people takes a big beating”.
I take this research with a grain of salt, but it raises some interesting questions …
Seems logical that the laws of proportionality would kick in … that a $1,000 expense has a greater stress-impact the poorer a person is.
And, it seems reasonable that stress would be distracting and sap some mental energy and acuity.
After all, most people lose some mental sharpness in stressful situations. That’s why folks are advised to delay big financial decisions for a while after, say, loss of a job or a loved one.
But, I’d think that the cognitive effect of an unexpected unbudgeted expense would be transitory – that is, go away once the shock wears off and the adverse situation is rectified.
That raises a bigger question:
What if the condition – unable to make ends meet – is persistent and not transitory?
Assuming that the research finding is directionally true, would persistent financial stress inflict a longer-term hit to a person’s cognitive functioning? A permanent hit to IQ?
Would a struggling person person actually get dumber over time?
If yes, what if a sizeable portion of the population was inflicted with financial stress?
Would the whole country be getting – on average – dumber?
If yes, that raises a HUGE question …
In a prior post What do tenured profs & Federal judges have in common?, we reported findings from the book Working Scared that:
Roughly 75% of the U.S. labor force (i.e. 100 million people) have been personally affected by or deeply concerned about joblessness.
The prospects for joblessness are financially daunting since 45% of Americans are not able to pay their bills for more than a month if they suddenly become jobless … and nearly 2/3s said they would be in deep financial trouble if an unemployment spell lasted for up to three months.
Connecting all of the dots, maybe the book title should have been Working Scared and Getting Dumber.
Think about it …