Archives for September 20, 2019

According to a recent survey by Bankrate, over half of U.S. adults don’t have enough money in the bank to tide them over for three months. And 28% say they have no emergency savings at all.

Brigitte Madrian, the Dean of Brigham Young University’s Marriott School of Business, joined Yahoo Finance’s “YFi PM” to discuss the situation and a plan she has to help fix this (while maybe shoring up retirement accounts at the same time).

“We have a proposal to help employers support saving for both retirement and for emergencies or rainy days” she said. The plan, outlined in a policy paper with several fellow scholars, would let employers automatically enroll their employees into short-term savings accounts alongside their retirement accounts.

At the beginning, the employees’ contributions would be split evenly. Then, once the savings account has enough funding to provide a decent cushion, all the savings would automatically flow toward retirement.

According to Madrian, the plan would give workers “the buffer that they need in the short term,” while facilitating “a greater retirement accumulation at the same time.”

A 2018 study from the Federal Reserve puts a point on the scale of the problem. The central bank found that 40% of adults, “if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money.” Americans often draw upon their retirement savings to deal with unexpected costs.

Under current law, employers are allowed to offer short-term savings plans to their employees (though few do). It is against the law for these plans to incorporate automatic enrollment.

Madrian appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans.

Her plan was informed by her work as a leading behavioral economist. She notes that “if you have two different accounts, you will have different labels attached to them,” so that just having the label “is going to change the way that you think about what you will allow yourself to do with the money in that account.”

She hopes that eventually the laws will change to allow the idea to be adopted widely. “Hopefully, at some point, the federal government will step into the mix to help all Americans save for retirement,” she says.

We all need money in savings, and if you don’t make an effort to accumulate some cash reserves, you’ll be in real trouble when emergencies arise. And although you may have every intention of saving money, your chances of success are limited if you fail to do these important things.

1. Follow a budget

The beauty of budgeting is that it gives you insight into where your money actually goes month after month. But if you don’t follow a budget, you could wind up missing out on key savings opportunities. 

For example, you might think you only spend $300 a month on entertainment and dining out. But if you actually spend closer to $400 a month, then that’s $100 you’re not adding to your savings because you don’t even realize why it’s going missing. A better bet, therefore, is to set up a budget and stick to it. Doing so involves listing your recurring monthly expenses, factoring in once-a-year expenses for which you should set aside funds every month, and comparing your total spending to your earnings. 

Now, you may have to make some changes if you create that budget and find that there’s little to no room left over for savings once your expenses are accounted for. But in that case, you’ll have your spending mapped out for you, and it’ll be easy to see where you need to cut corners.

2. Avoid impulse purchases

Steering clear of unplanned purchases is easier said than done, but if you don’t make an effort not to buy things on a whim, your savings could take a serious hit. In a recent study by The Ascent, 42% of respondents said they regularly waste money on impulse buys. But a few tweaks on your part could help you avoid them.

For one thing, don’t shop for fun; only hit the stores when there’s a specific item you’re looking to buy. Additionally, if you don’t trust yourself to avoid impulse purchases, leave your credit cards at home, and shop with cash alone. If you only stick enough money in your wallet to cover the items you know you’re after, you’ll take unplanned buying off the table. Additionally, force yourself to wait a full 24 hours before completing an impulse buy. That will generally give you enough time to come to your senses and realize that the item in question isn’t a need (or even a compelling enough “want”).

Finally, don’t be lured by the word sale. That’s generally just code for “let’s take this overpriced item and mark it down to what it should cost in the first place.” And again, if the item you’re looking at is something you don’t actually need, then buying it can ruin your savings efforts. 

3. Pay your credit card bills in full

When you don’t pay your credit card bills in full by the time they come due, you’re immediately penalized in the form of interest on your outstanding balance. Accrue too much interest, and it’ll eat up a large chunk of your earnings until your balance is paid in full. And the more money you throw out on interest, the less you can put into savings. 

The solution? Keep tabs on your credit card balance, know how much you can afford to pay off by the time your billing cycle ends, and pledge to keep your charges at or below that limit. And if you don’t trust yourself to follow that rule, you know what to do — stop using credit cards, and keep yours around for emergencies only.

Sometimes, all it takes is a little mindset adjustment to improve on the savings front. Stick to a budget, stay away from impulse buys, and avoid credit card interest so that your savings don’t suffer needlessly. 

Young Americans stressed about their financial health might take solace in one thing: they’re not alone.

According to new data released by Northwestern Mutual on Tuesday, a significant percentage of millennials and other young Americans are carrying large amounts of personal debt—and feel guilty about it. Millennials on average carry $27,800 in personal debt, most of it from credit cards, and members of Generation Z average about $14,000.

And while both generations trail Gen Xers and Baby Boomers in the study, the high debt averages paint a troubling portrait of Americans carrying large amounts of debt at a young age—saddling young Americans with financial uncertainty unlike that of their parents and grandparents.

“There are lots of people who exit school, and before they start their first job, have debt,” Chantel Bonneau, a wealth management advisor, told Buzzfeed News. “That is a different situation from 30 years ago.”

Nearly half of those surveyed said they feel anxious about their debt, and 35% of respondents said that they feel “guilty” about the extent of what they owe. About 20% say they are made to feel physically ill on a regular basis because of their debt.

But there is some reason for millennials and Gen Zers to be somewhat optimistic. Per the study, both generations are below the overall average debt for Americans as a whole: $29,800. And the youngest generations of Americans both trail Gen Xers, who carry an average of $36,000 in debt, and Boomers, who carry an average of $28,600. And the overall numbers have improved a great deal from last year, when Americans averaged $38,000 in personal debt, according to researchers.

Still, debt is debt, and entering their adult lives trapped under an oppressive burden of credit card and student loan debt has taken a toll on millennials and Gen Zers, who grew up in the shadow of the 2008 recession. Research has consistently shown younger Americans with dimmer financial prospects than those of their parents, with everything from life savings to life expectancy taking a turn for the worse. And while some of that trademark millennial dark humor can take some of the edge off, those looming problems linger like storm clouds over the rising generations of Americans—particularly as indicators suggest another recession may be around the corner.

“The road to financial security is long, even in the best of circumstances,” Emily Holbrook, senior director of planning at Northwestern Mutual, said in a statement announcing the latest numbers. “By carrying high levels of personal debt that road gets even longer, often requiring all kinds of detours and other twists and turns. The fact that there’s been some year-over-year improvement in debt levels is good, but the numbers still remain worryingly high.”

It may seem like student loans and millennials are inextricably linked. But a new survey shows that education bills are not the leading source of debt among this generation.

Millennials (defined here as ages 23 to 38) have racked up an average of $27,900 in personal debt, excluding mortgages, according to Northwestern Mutual’s 2019 Planning & Progress Study. The findings are based on a survey conducted by The Harris Poll of over 2,000 U.S. adults.

The biggest source of debt? Credit card bills. And that’s a “troubling” trend, Chantel Bonneau, a financial advisor with Northwestern Mutual, tells CNBC Make It.

“One issue that a lot of millennials have is that they have not wanted to sacrifice their lifestyle, even though they have student loans or lower incomes,” Bonneau says. “That has left us in this spot where they’ve accumulated a significant amount of credit card debt.”

That’s especially concerning because it’s important to save for future financial goals, such as buying a home or building a retirement fund, when you’re young and have time to let compound interest grow your money.

But because millennials are balancing both student loans and credit card debt, “the likelihood that millennials are prioritizing retirement in any meaningful way as an overall generation seems unlikely,” Bonneau says.

Yet for many millennials, the slide into debt goes beyond just lifestyle creep. Wages are not keeping up as day-to-day costs continue to soar, according to Alissa Quart, executive director of the Economic Hardship Reporting Project and author of “Squeezed: Why Our Families Can’t Afford America.”

The average paycheck only has the same purchasing power it did 40 years ago, a Pew Research report found. Almost two-thirds of millennials say they’re living paycheck to paycheck and only 38% feel financially stable, according to Schwab’s 2019 Modern Wealth report.

Student loans are also a factor. The number of households with student loan debt doubled from 1998 to 2016, Pew Research Center found. The median amount of loan debt millennials carried was $19,000, significantly higher than Gen Xers’ balance of $12,800 at the same age.

While it may be easy to criticize millennials for simply spending too much, it’s important to remember that there are other issues at play, Terri Kallsen, Schwab’s executive vice president of investor services, tells CNBC Make It. “Spending is not the enemy that we might think that it is,” she says.