Are your clients prepared for unexpected expenses?

Do most homeowners or renters have the resources to deal with unexpected expenses, such as a home repair?

In a recent Bankrate survey, 40 percent of respondents or their immediate family had a major unexpected expense last year. Of those 40 percent, only a little more than half, 57 percent “made it out of 2015 financially unscathed.”

“Let’s give everyone credit for that. Sixty percent are taking grown-up responsibility for the expense,” said Robert Fragasso, chairman and CEO at Fragasso Financial Advisors in Pittsburgh. “If it were $10,000 in uncovered expenses, the answers might be different.”

When an unexpected expense occurs, how do people handle it? Thirty-seven percent responded that they would use savings for an emergency, comparable to December 2014, when 38 percent of respondents answered the same way. Twenty-three percent responded that they would pay for an unexpected expense by decreasing their spending on other things. Credit cards and borrowing from family or friends were two options chosen by 15 percent each.

The survey found that those with larger incomes were more likely to rely on savings for emergencies. More than half, 54 percent, of those earning $75,000 or more annually said they would use cash for an unexpected expense.

On the other hand, less than a quarter, 23 percent, of people with yearly incomes less than $30,000 responded that they would use savings. Nine percent of respondents in this income level reported that they are unsure how they would pay for an unexpected expense.

“The survey shows that a very significant minority of American households apparently don’t have the resources to pay for an unexpected expense of around $1,000,” said Stephen Brobeck, executive director of the Consumer Federation of America.

Millennials were most likely to respond that they would use savings. Compared to last year, more millennials said they would use a credit card, while fewer millennials said they would need to reduce spending to afford an emergency expense.

To reduce spending, 58 percent of respondents would cut back on restaurant meals, 46 would reduce their cable or satellite TV, 41 percent would decrease buying coffee from a shop, 39 percent would cut back their cell phone plan and 35 percent would reduce spending on alcohol.

So, what to advise your clients? “Acting proactively rather than reactively to reduce spending should help you boost your savings and increase your peace of mind. There’s no way to avoid unforeseen expenses, but having a plan in place for emergencies could help you sleep at night,” said author Sheyna Steiner.