Although the average cash holdings (bank deposits) have increased in Denmark since 1996, almost half of the population still only has cash equivalent to one or two months of income. This is not just a temporary situation, according to research from the University of Copenhagen.
Danes' low cash holdings are remarkably persistent.
'People who have little cash one year typically still have little cash five, ten and fifteen years later,' says Leth-Petersen, professor at the Department of Economics and CEBI.
However, low cash holdings can make it difficult to cope with economic shocks such as unemployment. In a study based on data from Danske Bank and Statistics Denmark, Søren Leth-Petersen and his research colleagues show how people react when they lose their jobs.
'The two most important reactions are reduced consumption and use of savings. Loans and home equity extraction play a negligible role,' he explains.
Is it just bad luck - or personality?
Traditional economic theory assumes that people are the same and that differences in savings are due to external circumstances. But Søren Leth-Petersen's research points to preferences and expectations playing a major role.
"Some people are financially impatient and spend their money immediately. Others have low income risk and do not feel the need to save up," he says.
In a questionnaire with over 3,600 participants, the researchers measured financial patience through choice tasks. The result? The most impatient had significantly lower cash reserves - and were more often in arrears with loans.
Subjective risk is lower than assumed
In a study of 10,000 wage earners, Søren Leth-Petersen and his research colleagues measured people's own assessment of the risk of income loss. By comparing with register data, the researchers found that subjective risk assessment is generally lower than previously thought.
'This suggests that most people do not feel a need to save large amounts of cash because they do not expect major fluctuations in income. In fact, we see that those who experience less income risk also set aside less,' says Leth-Petersen.
Overall, Søren Leth-Petersen findings show that differences in cash holdings are not only due to accidents or life circumstances, but also personality and expectations.
'Some people save because they are patient or feel vulnerable. Others do not because they do not see the need. This is an important insight when we talk about financial robustness,' he says.
Financial robustness refers to households' ability to cope with temporary income losses and unexpected expenses without incurring expensive debt or making severe cuts to essential consumption. Small buffers make shocks more expensive - both for the individual, who risks arrears and loan defaults, and for society, when consumption is reduced.
'In the extreme, widespread weak resilience can undermine financial stability,' Søren Leth-Petersen notes.
The above-mentioned studies on Danes' small cash holdings are compiled in the research article 'Why do so many people have so little cash?', published in the journal Finans/Invest.
You can also hear Søren Leth-Petersen talk more about his research in the podcast "Rig på viden" (Rich in knowledge).
