Forty-year-high inflation. The pandemic’s ongoing effects. Failures to emphasize financial literacy in education. Hesitancy by many consumers to get professional financial guidance.
For a host of reasons, experts say, more of us are living check to check and aren’t prepared to deal with financial emergencies. The consequences can be serious, even dire.
“We’re seeing a lot of people get into a vicious cycle rather than a virtuous cycle,” said Daniel Roccato, a clinical professor of finance at the University of San Diego. “It’s sometimes through no fault of their own. An unexpected job loss, an illness, a divorce — it spirals.”
In a recent Bankrate poll, 58 percent of respondents said they were concerned about not having enough emergency savings. That’s 10 points higher than last year and 14 points higher than 2020. Of those 58 percent, three-fourths said they either didn’t have enough to cover three months of living expenses or they had no savings at all.
“Many consumers are on a knife’s edge,” Roccato said.
“It’s not always that they don’t know to save,” said Meghaan Lurtz, an expert on financial planning. “It’s a matter of life circumstances, things holding them back from doing these things.”
Lurtz teaches at Kansas State University, Columbia University and the University of Maryland. She’s also a writer and senior research associate for personal finance blog Kitces.com, as well as a past president of the Financial Therapy Association.
“We’re in interesting times, and I think that can be scary,” Lurtz said. “I study this stuff, and I study the emotions around it. I won’t say that I’m nervous, but this feels different than before.”
Whether you’re failing to plan or just struggling to execute, there may be pitfalls ahead.
Many of us rely on credit cards to deal with financial emergencies. Not all of us have a good sense of how much more we may end up paying.
Roccato points out that U.S. consumers carry an average credit card debt of around $5,600 these days, and that the average credit card rate stands at 19.4 percent. That translates into about $1,100 per year just in interest. And many consumers carry a lot more debt and/or higher rates.
Paying for basic living expenses like groceries with credit cards is generally a bad sign, but inflation has made it more common.
“All of us have essentially taken a 3 percent pay cut over the last 12 months,” Roccato said.
Relying too much on credit cards also can damage your credit score, making it harder to borrow money, harder to sign a lease — even harder to get a job, with more employers checking credit history. Fall far enough behind and you may be faced with other difficult choices, including high-interest payday loans, asking family members or friends for financial help, losing possessions and possible bankruptcy.
Even if you’re able to scrape by for now, you may have less financial freedom down the road. Retirement may happen later than you hoped. If you’re already retired, current financial conditions are making it tougher to stretch those savings.
“When you go into retirement,” Lurtz said, “if you experience bad years in those first few years, that can make it really difficult to catch up.”
Tips for Turning Things Around
Well, that sounded grim. So what steps can you take to start digging out, if you find yourself with little to no safety net or less financial freedom in your future?
Roccato’s first tip is simply to acknowledge your financial issues and create a plan.
“Be clear-eyed about your situation,” he said. “Putting your credit card bill in your sock drawer and hoping it goes away isn’t going to work. Hope is not a good strategy.”
Beyond that, it might be a good time to take stock of what you have sitting around the house or out in the garage. Studies have shown that the average consumer has around $400 worth of unused possessions. You could also consider other sources of revenue, including part-time gig jobs. Do you really need two cars these days? Give questions like this some thought as you try to right-size your life to match your income.
Do what you can on that emergency fund. Conventional wisdom calls for 3-6 months of living expenses, but even $500 would be a good start. Also, beware of over-improving your home. And do your homework before you dive into fintech apps.
“‘Buy now, pay later’ can turn into ‘Buy now, poor later,'” Roccato said.
Lurtz strongly recommends getting help from a financial professional and advises that it may be more attainable than you think. Certified financial planners can be a big help, but there are other, less expensive options. Financial counselors connected to banks or your 401(k) might not be able to write a full-on financial plan, but they’re often able to help with those first steps toward straightening things out.
So what holds people back? Lurtz cites a common misconception that financial planning is just for “rich people.”
“I teach students across three universities,” she said. “I talk to people about this all the time. There’s a growing population of financial professionals that want to work with people who don’t have $1 million.”
Many consumers also might struggle with fears around not understanding financial terms, or shame and regret about their financial situation. It’s worth working through these issues, Lurtz advises.
“People who have those professional financial partners are happier,” Lurtz said, citing research by her colleague Sonya Lutter and others. “They aren’t there to judge you. They can be great resources just for getting on the right track.”
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