You can choose to be in denial but unless specific actions are taken, the average American is vulnerable to a potential financial implosion with dire consequences. Forget opinions! They’re great to stimulate conversations, but I place greater value on evidence. Let’s dig into it.
1. American household debt levels are at a record high
In the 1st quarter of 2019, US consumer debt reached $14 trillion according to Ben Mohr, senior research analyst of fixed income at Marquette Associates. You’d figure the 2008 financial crisis would’ve taught Americans’ valuable lessons about debt and savings, but on the contrary, consumer debt is historically high while the US personal savings rate remain at it’s lowest level since the mid-2000s. In fact, a recent Federal Reserve survey claimed 35% of U.S. adults reported that they would not be able to pay all of their bills if faced with a $400 emergency. The majority of this total household debt is mortgage debt [no surprise there], while other debts include credit cards, auto, personal and student loans.
Now, there’s actually nothing wrong with taking on ‘cheap debt,’ actually it’s the best time to take on debt. In fact, a strong demand for home ownership, historically low interest rates and rising house prices have resulted in just that – increased levels of debt. But the amount of debt should be “affordable” even if interest rates were to rise or unforeseen circumstances, such as a spousal lay off, suddenly resulted in a lower household income. Wouldn’t it be better to take on a level of debt that will also allow you enough leeway to take annual vacations, while saving into your retirement nest egg? Nobody really knows when the next financial implosion will occur, but let’s face it, debt management may seem cozy at the moment…until it isn’t.
2. Most Americans live paycheck to paycheck
According to a recent report from CareerBuilder, nearly 8o% of American workers, including 10% of those who make more than $100,000 a year live paycheck-to-paycheck. Shocking! The same report claims nearly 75% of workers say they’re in debt today with more than 50% of them saying they’ll never be debt-free. Even the “rich” six-figure income earners are not immune from facing financial difficulty as they increase their spending in correlation with their income. In a recent survey by GoBankingRates, nearly a quarter of respondents with incomes of US$150,000 or more had less than $1,000 set aside for emergencies and one in three had nothing saved for retirement. Though alarming, it isn’t surprising considering possible culprits include Mortgage-related debts, Credit card debts, Student loans and even higher cost of living.
In a separate recent report, the US Federal Reserve reported total credit card debt had reached its highest point ever in US history, surpassing $1 trillion. One reason for this could be that credit card interest is so high and combined with compound interest, you would barely make a dent to your growing balance with “convenient” minimum payments. And there’s the trap! Compound interest is a topic best left for another day but just realize that it’s good for investments but bad for debt. It still amazes me when financial publications or financial websites offer reviews for “Best Credit Cards.” Isn’t that an oxymoron? There’s no such thing as the “best” credit card – it’s a debt tool!
Many would argue for the value of points and rewards obtained when using their credit card for “expenses they would pay anyways.” The problem is it’s convenience causes consumers to rack up a bill much higher than they expect until the bill arrives at a later date and SURPRISE! How did this happen?!? Remember, with credit cards you’re not paying with your money, you’re borrowing someone else’s money to make purchases. What good are points and rewards if you sink into a debt you can’t get out of? It’s a brilliant system to keep you in debt while you make ‘profitable’ minimum payments.
3. US home prices are expected to rise at twice the speed of inflation and wage growth. The beginning of a crisis?
Average home prices are significantly higher than they were at the peak of the housing bubble in 2006, according to the S&P Case-Shiller national home price index. The combination effect of personal disposable incomes not accelerating at the rate of overvalued homes and supply not keeping pace with demand, making home ownership less affordable present a ‘red alert’ situation for the personal finances of many American households.
We’re well aware that record low interest rates and stimulus spending have been the driving force behind this housing market frenzy. With greater demand came higher prices – simply because people are willing to pay for it. But let’s consider several plausible “what if” scenarios. What if there’s an economic downturn resulting in lower than expected job growth? We already know that most Americans are living paycheck to paycheck. What impact will trade deal disturbances with China, Canada and Mexico have? What are the implications if interest rates rise too fast? How will American pocketbooks be affected if consumer debt levels and cost of living rises, including higher oil, gas and energy prices?
I think we can all agree that any one of these scenarios can potentially cause decreased borrowing resulting in decreased demand. With demand falling, people may not be so willing to pay for such record high prices for homes. For those who have already locked themselves into a record sale purchase, it may be tough to resell at an equal or greater price, forcing themselves to hold on to the property. This scenario would give them less “wiggle room” to cover emergency expenses, take a dream vacation, or as the following point illustrates, money left over to save and invest for retirement.
4. Fact: Most Americans are not saving enough for retirement. Cheers to your semi-retirement!
According to a report from GoBankingRates, over 40 percent of Americans have less than $10,000 saved for retirement and those nearing retirement with savings, only have around $120,000 for their nest egg – not enough to afford a retirement once the paychecks stop coming in. The main barriers to saving were reported as “Expenses” and “Job isn’t good enough.” What does this mean? About 40% of Americans are expected to retire broke with women still lagging behind men in retirement savings. According to the Social Security Administration, we are living longer which is great, but saving less which will have a detrimental financial impact, especially on those among us without a company retirement pension. This may suggest that ‘semi-retirement’ could be the new norm for Americans.
The consequences could result in: serious debt if income stops coming in, with dependence on high interest loans including credit cards to compensate for the shortfall; increase in stress associated with financial hardship and an inability to strive towards goals diminishing your quality of life.
5. Most Americans don’t have a financial plan. Having one ‘in your head’ doesn’t count.
According to Charles Schwab, only 25% of Americans have a financial plan! Some of the top reasons cited for this inadequacy included: ‘they don’t think they have enough money to justify a financial plan, the idea of a financial plan never occurred to them, or they wouldn’t know how to begin getting a plan.’ Joe Vietri, senior vice president and head of Schwab’s retail branch network, says “the idea that financial planning and wealth management are just for millionaires is one of the biggest misconceptions among Americans and one of the most damaging,…the longer they wait the harder it is to achieve long-term success.”
Why do such conflicts exist even though there’s easy access to financial services in the financial industry? Clearly there are a few problems that need to be addressed. First, how can people access the services they need at a price they can afford? Not everyone can justify spending thousands of dollars to simply hire a ‘financial quarterback.’ Second, if a decision is made to hire a professional, there are so many credentials, designations and options out there, it’s difficult to determine who to hire, making the process seem more complicated than it really is. Third, it doesn’t help that financial firms charged embedded fees creating distrust among potential clients. Let’s face it, if you’re a fund manager and you’re being paid based on the size of your client’s account and the amount of the trailer fee, what incentive would you have to care as much about the “performance” of the fund? It’s no wonder such discrepancies have given rise to a growing trend of online wealth management services that are more accessible, affordable and transparent.
Are you starting to notice the calm before the storm? This is an issue of accountability of our actions and habits which a government bailout cannot solve. What should you be doing to minimize the impact of this financial storm? The key here is preparation! Gather all of your materials, supplies and resources to make sure you’re ready. To accomplish this, It doesn’t matter if you use the solowealth financial plan or hire a financial planner, as long as you have a PLAN! By placing you in the driver’s seat, the solowealth financial plan dispels common excuses about cost, confusion and trust. The only excuses it can’t address are complacency and lack of motivation. The question you should ask yourself is: “If I address all 10 steps of the do-it-yourself solowealth financial plan, will I be better off than I am now?” Given the evidence presented, the answer is obvious.
It’s never too early to prepare and make the coming year your most financially prosperous yet!
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