The financial health of many Americans is more surprising than you may think. While personal finances in this country have improved in the last few years, the recently released Federal Reserve Report on the Economic Well-Being of U.S. Households highlights many areas of concern. From statistics on employment and savings to figures on retirement and debt, the results can also serve as a learning opportunity for those seeking to improve their financial position by avoiding many of the common financial mistakes in the report. The surprising facts noted below may help to inspire you to proactively improve your financial well-being this year.
Credit & Debt
The individual balance sheets of Americans have been slowly healing since the financial crisis. Despite the fact that debt levels have declined, the Federal Reserve survey noted that debt levels are still an issue with nearly 57 percent of Americans carrying a balance on their credit cards in the last year. Why do so many turn to credit cards as their safety net? Generally, a lack of sufficient cash reserves tends to magnify debt levels when unexpected expenses occur. Surprisingly, nearly 46% of respondents stated they wouldn’t be able to handle a financial emergency of $400 without having to borrow money or sell belongings. While it may be easier said than done, setting aside funds each month in a separate cash reserve account may help prevent excessive levels of debt as inevitable financial emergencies occur over time. Consider paying yourself first by establishing a solid emergency fund – doing so may help reduce your reliance on debt in the future.
Education debt levels
In additional to traditional credit card debt, there is over $1.2 trillion in student loan debt. In fact, 41 percent of respondents with education beyond high school had to incur some form of debt to finance it. While an education can be a solid investment, many students spend a disproportionately high percentage of household income on education costs. It may be possible to reduce costs by looking into more cost effective schools and focusing on degrees that could provide more attractive employment prospects - ultimately accelerating loan payments after school. If two institutions may provide the same job opportunities after graduation, why spend an extra 30 to 50 percent on tuition if you do not have too? This statistic highlights the importance of implementing a strategic approach to addressing the investment in a college education. Another approach that may help reduce student loan debt is to leverage educational savings accounts in advance. 529 plans are one popular tool that may be worth reviewing earnings will generally be tax free if they are used for higher education. Many 529 plans also allow parents to get started with as little as $25 per month in savings, providing a way to proactively address a portion of education costs years before the tuition bill arrives. Consider speaking to your tax adviser to determine if your state offers any tax deductions or other incentives before investing in a 529 plan.
Unprepared for health expenses
Despite recent healthcare reform, many Americans remain unprepared to handle health care costs. 22 percent of survey respondents noted that they paid an average of between $2,000 and $3,000 in out of pocket health care expenses in the last year. This has led to nearly 46 percent of Americans incurring some form of debt to cover the cost of medical treatment. While the rate of Americans forgoing various medical treatment has declined in the last year, a significant number continue to avoid care as a way to minimize costs. This includes skipping treatment from a physician (12 percent), forgoing prescriptions (11 percent) and avoiding dental work (20 percent). Taking the time to carefully review benefit alternatives with your company HR department or through your state exchange is critical to maintaining coverage that is a good fit for your needs. Like other budget shortfalls, many Americans fail to properly account for unexpected health care expenses that often arise. The Employee Benefits Research Institute also notes that the average couple retiring today will need over $240,000 to cover future medical care. Bottom line - careful medical planning is critical to being better prepared for the future.
Retirement savings continues to be an area of concern for many Americans. In fact, according to survey results, approximately 49 percent of adults with self-directed retirement accounts are either “not confident” or only “slightly confident” in making the right investment choices. Additionally, nearly 27 percent of non-retired Americans over the age of 60 stated they have no retirement savings. With life expectancies continuing to lengthen, the sooner you begin planning for “life after work”, the better. Consider establishing a comprehensive financial plan to assess your retirement readiness while also reviewing your investment portfolio. While getting started early is advisable, there may be steps that can be taken even later in life that may help you pursue your goals.
While there have been notable improvements in household finances in some areas, there are many financial lessons to be learned from the survey results. More than anything else, it is important to use your own goals as the measuring stick of your success rather than national averages. Since everyone's situation is unique, consider speaking to your financial adviser to determine the most appropriate strategies for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.