4 Scary Financial Facts (And 4 Ways to Avoid Them)
Don’t become a victim of these frightening financial mistakes.
Every day we’re bombarded with negative statistics that make us frightened, anxious, and confused. When it comes to financial matters, this is even more true. What should we be doing with our money? What are other people doing with their money? Are we falling behind? Are we just another statistic?
Americans are preoccupied with anxiety and constant stress about their finances. Don’t let money be another worry in your life.
Here are four of the worst financial statistics—what constitutes them, but more importantly how to avoid them.
61 percent of Americans don’t have enough savings to cover a $1,000 emergency.
Whether it’s a medical problem, an auto repair, or a job loss, unexpected emergencies can happen to anyone at any time.
What’s even more frightful is that an overwhelming number of Americans don’t have the funds available to cover these unexpected costs.
According to a 2018 survey, 34 percent of American households experienced a major unexpected expense in the last year, with only 39 percent of respondents saying that they would be able to cover a $1,000 price tag using their savings.
In fact, here is how Americans pay for unexpected costs:
- 39% pay the costs using savings
- 19% finance with a credit card and pay off the amount over time
- 13% reduce spending on other things
- 12% borrow money from family or friends
- 5% take out a personal loan
By having to rely on credit, loans, and borrowing money, it’s evident that a large portion of the population is budgeting for the short-term, if it all. While it’s difficult to plan for the future, especially when many Americans live paycheck-to-paycheck and focus on meeting basic survival needs, an emergency fund is a necessity that can provide financial security and reduce worry.
What you can do.
The purpose of an emergency fund is to improve one’s financial security by establishing a safety net that can be used in situations to meet unexpected expenses while reducing the need to withdraw from high-interest debt options, like credit cards and predatory loans. With an emergency fund, you are also less likely to go bankrupt or build unnecessary debt when an emergency cost arises.
While easier said than done, it’s still possible and necessary to put away some money while simultaneously paying monthly bills, reducing credit card or student loan debt, and working towards other financial goals. It’ll just take carefully executed planning and possibly some sacrifice. Say goodbye to take out food seven days a week.
The best solution is to start right now. Even if you have $0 saved, start by setting aside $1 a day. That’s $365 after an entire year. Up your savings to $5 a day and suddenly you have a fund of $1,825 after one year.
Divert a portion of your paycheck to a savings account through direct deposit or set a monthly reminder to “pay yourself first” by transferring funds from a primary account to your savings.
For beginning savers, financial experts recommend building a $1,000 emergency fund to get started. This will help you ease into understanding your monthly income versus expenses and allocating some money for savings. Once a well-funded cushion is established, earmark more money to create a solid $2,000 emergency fund. Keep upping your savings targets from there.
Ultimately, the goal should be to save at least three to six months of your salary, not only for unexpected costs, but in the worst case scenario of losing your job. Having this money will ensure that a couple months’ worth of living expenses are covered while you figure out another source of income.
40 percent of student loan borrowers are expected to go into default by 2023.
Education debt in the United States has tripled over the last decade, exceeding $1.5 trillion. And for student loan borrowers, future prospects are looking increasingly bleak.
When you borrow money from a lender, you agree to terms specified about repaying the loan. If you fail to make on-time payments, you may fall into loan delinquency. Extended delinquency then results in loan default, or the failure to repay a loan, with the loan amount being sent to a collection agency. Default may occur immediately or after several months of missed payments, depending on the timeline outlined in your loan terms and state or federal laws.
Within four years after leaving college, nearly one out of four student borrowers defaults—more than one million students annually. Within two years, 29 percent of students enter delinquency on their federal student loans and 19 percent enter delinquency on their private loans. By 2023, nearly 40 percent of borrowers are expected to default on student loans.
This isn’t surprising considering the uncertainty of job prospects and the instability associated with transitioning out of college. Borrowers may find themselves in financial distress and unable to manage student loan repayments.
To make matters worse, defaulters’ credit scores take a big hit. Those who have defaulted on student loans have an average credit score of 550—considered on the cusp of subprime credit. By comparison, borrowers in good standing have average scores in the high 600s.
Those with low credit scores typically pay higher interest rates, have difficulty renting, delay or are unable to buy homes, and may even be disqualified from certain jobs. Defaulting will even increase a student loan borrower’s balance because of collection fees and accumulated interest.
Other negative effects of student loan defaulting includes, but is not limited to, wage garnishments, tax offsets, suspension or revocation of state-issued professional licenses, and driver’s license suspension.
It’s important to note that people who default on their student loans are more likely to live in Hispanic and black neighborhoods. Further, people of color carry a disproportionate amount of student loan debt, due in part to less familial wealth and higher unemployment rates than their white counterparts.
What you can do.
It’s crucial to be proactive with student loans or any other kind of debt.
For current or future students, minimize the amount of student loan debt that you take out by exploring grants, scholarships, and part-time jobs.
Ideally, graduates have budgeted their repayment amount into expected monthly expenses. However, if you find yourself unable to repay your student loans, there are secondary options available outside of borrowing money from family or friends.
Contact your student loan servicer as soon as possible. If you’re hesitant, contact your college or university to see if the financial aid office offers services to help with this. You’d be surprised, but some staff are trained to assist students with everything from imparting student loan advice to acting as a liaison on the phone with service providers.
Exploring your repayment options typically means finding a repayment plan that is better suited for your situation, such as an income-based repayment plan or a temporary deferment or forbearance. Putting your student loans into forbearance is one relief option that allows you to temporarily stop making payments, without the accumulation of interest.
If your student loans are already in default, still call your loan servicer to ask about how to return to good standing. Solutions typically include loan rehabilitation, loan consolidation, or paying off the loan in full.
Use loan rehabilitation wisely, as it is a one-time opportunity to clear default and regain eligibility for federal student aid. This nine- to 10-month program is an agreement between the lender and borrower for affordable repayment amounts over the course of nine months that will rehabilitate a defaulted student loan. Once the borrower makes these on-time payments, the default status is removed from their account and credit history.
Loan consolidation is the combining of multiple federal education loans into one, thus allowing a single monthly payment.
38 percent of U.S. households have credit card debt.
Debt of all kinds is a major problem in the United States, with consumer debt set to reach $4 trillion by the end of 2018. Low wages and a high cost of living is the perfect storm pushing people to to spend outside of their means.
Looking at credit card debt, the Federal Reserve Bank of New York reported that credit card balances rose to $26 billion in the fourth quarter of 2017.
Want more frightening credit card statistics?
- Total credit card debt increased to over $1 trillion last year in 2017.
- 43 percent of Americans have been carrying a credit card balance for over two years.
- The average household with credit card debt owes $16,883 and pays $1,292 annually in interest alone.
What you can do.
Credit is a double-edged sword. It can be used to finance wealth-building purchases, but it can also lead to excessive debt and snowballing interest.
Credit cards are the most common form of credit, and a simple rule for responsible use is to not buy anything you couldn’t pay for with cash. (There are, of course, rare exceptions, such as emergencies.) Think of credit cards as plastic cash and not as a gateway to revolving debt. If you can’t pay off your credit in a reasonable time frame, then don’t make that purchase!
Another rule is to maintain a low credit card balance. We’ve all heard of the 30 percent utilization rule—now, just stick to it. Maxing out a credit card or coming close to credit limits and then not paying it off in full each month almost guarantees a lowered credit score. Decrease unnecessary spending and in some cases consider temporarily diverting money from a retirement account or an emergency fund in order to pay down credit card debt as quickly as possible. The accrued interest could cost hundreds or thousands for those only making the minimum payments each month, so be sure to prioritize payments by higher interest balances.
Finally, make every payment on time. Delinquent accounts will be reported to the three major credit card bureaus—TransUnion, Experian, and Equifax. Severely delinquent accounts run the risk of being closed by the creditor and sent to a collections agency.
For those who are deep in debt, you’re not alone. Don’t be afraid to reach out to your creditor, a financial advisor, or another trusted source about your situation. Some creditors may be able to create a payment plan or reduce your card’s interest rate. With a plan and commitment, you can turn your situation around.
33 percent of American adults have $0 saved for retirement.
A recent survey revealed that a majority of Americans aren’t saving enough for retirement—33 percent of respondents said they had no retirement savings, and 23 percent said they had less than $10,000.
Women are even more vulnerable, due to the gender pay gap, longer life expectancies, and an investment gap. Sixty-three percent of women, or about two-thirds, say they have no savings or less than $10,000, compared to 52 percent of men. With women saving and investing significantly less than men for retirement, this could add up to $1 million over time.
Retirement savings are also closely correlated to age.
Millennials are the least likely to have a large retirement fund, since they are the most recent to join the workforce. Forty-two percent of millennials say they have no retirement savings. On the other hand, 30 percent have saved under $10,000, and 28 percent have saved over $10,000.
What does this mean for most Americans? Perhaps the barriers to starting a retirement fund prove a significant reason to simply opt out. A lack of retirement planning education, an increasingly grim outlook on the future, and the difficulties of rolling over funds after job hopping indicates that opening a retirement savings account may be viewed as a hassle.
However, the consequences of not saving for retirement can play out in a number of terrifying ways.
What you can do.
For young people just starting their careers, saving now and saving regularly will make all the difference.
Use the power of compounding interest, or the addition of accrued interest to the principal deposit, to your benefit. Even a small amount set aside early and contributed to regularly could provide a decent retirement.
Many financial planners recommend saving 10 to 15 percent of your income in a retirement account when starting your career. Saving as little as five percent could make a huge difference in the long term, especially if your employer matches. Always take advantage of employer matching since it could help you reach the target savings amount with a smaller individual contribution.
Younger people are in the best position to recover if they’ve fallen behind because they have more time to use compound interest to their advantage.
For those age 40 and over, however, the picture is much more bleak. Anyone nearing retirement age will want to have significant funds, otherwise they will have to play catch up with an aggressive savings plan. This means saving three to four times as much as younger people.
Procrastination is the root of the problem. With less time to save as the years pass, older age groups need to sit down, have an honest conversation about their financial priorities, and most likely adjust their expectations.
Let this be a lesson that saving money for a comfortable retirement nest egg is a wise investment, no matter what age you begin.