When compared to other countries throughout the world, the average American is wealthier and more prosperous than their peers. However, just because we make more money, doesn’t mean we know what to do with it. In fact, the average American is downright awful at management money.
The Sad State of Personal Finance in the U.S.
Perhaps you’re the rare exception, but most Americans are pretty terrible at personal finance. And while millennials tend to be the worst of the group, even older generations don’t exactly have their act together. It’s a multi-generational issue that’s sad, deflating, and damaging.
Americans have this over-inflated sense of reality. While optimism is good, it has its limitations. People continue to assume that things will just get better as time goes on, but this isn’t necessarily true. To enjoy financial freedom down the road, you have to make smart decisions today. All you have to do is check out some of the follow trends and you’ll see that our collective decision-making is off kilter.
- According to a 2017 GoBankingRates survey, 57 percent of Americans have less than $1,000 in their savings accounts. A shocking 39 percent have no savings at all.
- The average American household carries $137,063 in debt, despite the median household income being just $59,039. The average credit card debt is $16,883, while the average auto loan debt is an astounding $29,539.
- Research shows that more than half of Americans will retire broke. In fact, 34 percent of working Americans don’t have any retirement. Another 42 percent have less than $50,000 – which would barely last one year in most situations. Only 14 percent of Americans are well on their way to a comfortable retirement, with $300,00 or more saved up.
- An estimated 12 million Americans say they keep some source of money secret from their spouse or romantic partner. Therefore, it should come as no surprise that financial issues are one of the leading causes of divorce.
There’s enough blame to go around – and plenty of factors that play a role in these bad personal finance habits – but they almost all stem from two things: a lack of knowledge and discipline. Financial literacy programs exist, but they don’t seem to be having much of an effect.
“I have not discovered in my own work any gold standard,” says Anand R. Marri, vice president and head of economic education for the Federal Reserve Bank of New York. “There is a lot of interest in it from nonprofits, the federal government, state governments, schools, and corporations. But I have not seen a program and said, ‘This is the best way to do it.’”
Even when financial literacy programs do work, many people simply don’t take the time to cultivate the motivation and discipline that’s required to make smart decisions with their money.
Managing Money the Smart Way
While the current situation is bleak, to say the least, hope should not be lost. Plenty of Americans are properly managing their personal finances and there’s much to be learned from how they approach these issues. Keeping this in mind, here are some practical tips for managing money the smart way.
- Repair Your Credit
Roughly one-third of Americans have a credit score that’s lower than 601 – which is the distinction between having “bad” and “fair” credit. Just 22 percent of people have excellent credit, which gives you access to the best credit products on the market.
The first thing Americans need to do is work on fixing their credit. Some of this happens naturally through smart decision making – more on that in the following tips – but it’s also a good idea to review your credit report for any errors and omissions.
One in five Americans has a mistake on their credit report that’s dragging their score down. By hiring a reputable credit repair company, you can get assistance in removing these errors.
- Create a Budget
It’s impossible to be smart with your money if you don’t know how much you have coming in and going out. This is why it’s so important to create a budget that identifies your income and directs your spending towards the categories that matter most.
- Discipline Your Spending
A budget is one thing, but you have to be disciplined in your spending if you’re going to make smart purchases, pay down debt, and save up money for the future.
While a lot of Americans claim they don’t make enough money to pay down debt and cover monthly bills, this is rarely the case. If you study your spending habits a little more closely, you’ll likely see that you’re spending hundreds of dollars per month on fast food, bar tabs, online shopping, cable TV, and extravagant purchases that you don’t really need. By reallocating this money, you’re essentially giving yourself a pay raise.
- Save for Retirement
Finally, it’s important to have a little foresight and save up for retirement. While retirement might seem far away, you can do yourself a huge favor by tucking away a little bit every month.
Did you know that by simply maxing out an IRA each year ($5,500) between the ages of 25 and 65, you could build a retirement account of more than $2 million on an average rate of return? If you wait until age 30 to start contributing, that amount goes down to $1.2 million. Wait until 40 and you’re talking about just $500,000.
It doesn’t take a lot to save for retirement – so long as you start saving early and often. While it may seem strange to put money into something you aren’t going to see for another 20, 30, or 40 years, your future self will thank you.
Smarter Money Management
Knowledge and discipline – if Americans can find a way to master these two areas of money management, it’s possible for our country to correct course and become both wealthy and savvy. Until then, we’re in trouble.
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401(k)s were meant to be a supplement to the corporate defined pension plan. However, corporations soon saw a way to save money and transfer the risk and the funding of pensions from their corporate bottom line to their employees. At the same time, corporations were able to limit wage growth as a result of many interlocking issues (weakening of unions, international trade pressures, etc. ). So, saving up enough for retirement is not a failure of an individual’s initiative, but the inevitable result of public policies that favored interests above those of employee security. Don’t blame the victim.