For a country with citizens that are far wealthier, on average, than citizens in the majority of the world, why is it that Americans are so inept at personal finance? Between high debt, poor credit, miniscule savings, and irresponsible spending, a significant percentage of the country is in trouble. And if something isn’t done soon, another collapse could be imminent.
American Finances: Clueless and Clumsy
The economy has been on the right track for the past seven or eight years, but that doesn’t mean the financial IQ of individual Americans has improved all that much. All it takes is a cursory look at the state of personal finance – and the knowledge the average person has on important topics – and a troubling reality begins to emerge.
According to a GuideVine survey of 1,000 Americans over the age of 30, less than half of people can confidently explain what a 401(k) is. And when it comes to explaining other basic financial concepts, the numbers aren’t much better. Many struggled to define terms like interest (48 percent), bankruptcy (48 percent), and how inflation works (34 percent).
Furthermore, the study shows that just 13 percent of participants have a five-year plan for their finances. Nearly one out of three respondents said they could never envision a life for themselves where they wouldn’t have some sort of debt. Roughly 36 percent said a comfortable retirement won’t be an option.
A 2017 NerdWallet study reports similar findings. “About 1 in 10 Americans (11%) say they spend more on monthly expenses than their household income allows, and about one-third (32%) say they just make ends meet,” NerdWallet staff writer Anna Hehloski explains. “Thirty percent of Americans are not saving for retirement, and about one in five (19%) have nothing saved for emergency expenses.”
Despite the median household income being just $59,039 per year, the average American household carries $137,063 in debt. While some of that debt could be classified as good debt (like a mortgage), much of the debt belongs to credit cards, auto loans, and student loans.
How Can Americans Get Back on Track?
The reality of personal finance in the U.S. is sobering. However, by making smart choices, Americans can get back on track. Here are a few keys to getting things moving in the right direction.
- Clarity
Many households don’t know how much money is coming in, how much is going out, or exactly how much debt is attached to their accounts. Without this information, it’s nearly impossible to dig your way out.
The first step is for American households to sit down and get a pulse on what’s happening. This means tracking down paperwork, creating a budget, and understanding exactly what’s going on from month-to-month. Once these important factors are illuminated, further action can take place.
- Education and Assistance
There’s clearly a disconnect between what Americans need to know in order to be successful and what they actually know. The only way to close this gap is through proper education – and that starts from the bottom-up.
Personal finance should be a required course in public high schools around the country. By teaching students about important financial topics before they enter the real world, they’ll be better prepared for success.
It’s also important for Americans to know when to seek assistance. For example, it often makes sense to hire a professional to get help with taxes, accounting, credit monitoring, and other important areas of personal finance. In many cases, these services are cost-effective and can help households gain control.
- Discipline and Foresight
There’s a common misconception that you have to make six or seven figures in order to become financially successful and independent. However, there are plenty of millionaires who never made $100,000 a year.
Mindset matters just as much as money. A disciplined individual making $65,000 per year has a much brighter future than a wasteful spender making $150,000 per year. Individuals must learn how to cultivate discipline and set financial goals for the future. In doing so, the rest will fall into place.
- Debt Elimination
Debt is constricting. When you have debt payments, it limits your spending/saving power and immediately puts you at a disadvantage at the start of each month. That’s why debt elimination should be one of the primary focuses of personal finance.
Paying minimums on debt is a recipe for disaster. Americans need to be paying as much as they possibly can each month in order to eliminate debt as quickly and efficiently as possible. Start with high-interest debt and work your way down. Once you start seeing results, it’ll get easier and easier.
After debt has been paid off, the money that was going towards these payments can then be allocated for savings and retirement. It’s a good idea to put three to six months of expenses in a savings account and then start putting 15 percent of your monthly income towards 401(k)s and IRAs.
Time is of the Essence
Unemployment is lower than it’s been in decades, the stock market is doing fine, real estate prices are going up, and opportunities exist for anyone who is ambitious enough to find them. In other words, now is the time for Americans to get their personal finances in order.
If Americans, as a collective group, don’t figure out how to address topics like budgeting, investing, debt, and retirement savings, we’re going to be in trouble. The government can create rules and programs, but it’s up to individual citizens to execute.
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