Whatever Happened to Saving for a Rainy Day?
My leak wasn’t this bad, and my recovery will be easier (photo from Divided Sky Roofing and Solar).
I woke up yesterday morning to the comforting sound of rain outside. Then I came into our kitchen to the terrifying sound of rain inside. A leak. I went up on the roof; looked for a source; couldn’t find it. So I bought a giant tarp – that’s stopped the water for now -- and called a roofer. It ain’t gonna be cheap to fix.
Life happens to all of us. Every year one quarter of Americans face a major house or appliance repair. About 30% have a major medical expenses. One in three of us have to unexpectedly repair or replace a vehicle.
We’re going to be fine with our roof — if insurance doesn’t work, we have cash in reserve.
But these days more and more of us don’t save for our rainy days.
At NC State’s Emerging Issues Forum earlier this month, I heard experts from across the country discuss what’s happening with American’s “financial resiliency.” I learned some sobering news about how many of us are one emergency away from disaster. And I got a peek at a few promising solutions.
First here’s some data.
We’re living on the edge:
Americans these days save about half as much as people in Sweden, Germany, Switzerland, Luxembourg and Mexico. That means most of us have a very small cushion in our lives to absorb bumps, dents -- or leaks.
Forget all hell breaking loose; we can’t handle even a little bit of purgatory.
· 38% of us struggled to pay bills at some point last year.
· 20% of us couldn’t pay more than two weeks of expenses if our primary source of income went away; another 20% couldn’t pay more than a month of expenses.
· All sorts of people are vulnerable. The Consumer Financial Protection Bureau (CFPB) reports that the group most likely to have one month or less of income in savings is adults aged 35-54. Families of color struggle more: 85% of Blacks; 75% of Hispanics and 57% of Whites have less than one month of income available in savings. Families making less than $50,000 a year are most vulnerable — no surprise there — but at the Emerging Issues Forum, Washington Post financial columnist Michelle Singletary noted that 25% of families making more than $150,000 a year live paycheck to paycheck.
How did we get to this point?
We’ve embraced the singularity: More American adults are going it alone, whether unmarried or divorced. In the past five years, the percentage of people living alone has risen from 24% to 28%; in cities like St. Louis, Washington, DC, Cincinnati, Cleveland and Richmond, more than 40% of people live by themselves. It’s hard to save when you’ve only got one income.
Might as well face it: we’re addicted to spend: Over the past 40 years, real income for Americans hasn’t budged. But real spending has.
We spend more because it makes us feel good.
We spend more because technology makes it so easy – find; click; buy.
And we spend more because marketers are really good at their jobs.
David Kelly, chief global strategist at J.P. Morgan Asset Management, summarized it this way recently: "[C]onditioned by decades of pervasive advertising, we have been taught to buy not just all that we need or even all that we want but all that we can." At the Forum, Singletary cited research showing that 20% of our buying decisions are based on logic; the other 80% are based on emotion.
Critical expenses have gotten more expensive: Over the past twenty years, the cost of some of the major sources of debt has been increasing faster than inflation. College costs have increased 88% more than inflation; home prices have increased 70% more than inflation; medical costs rose 41% faster. Meanwhile wages only increased by 15% more than inflation.
Going in debt has gotten easier: When I got out of school, getting my first car loan was tough: I was making $9,000 as a school teacher and had no credit history. Nowadays we start getting credit card offers as teenagers. Anybody can borrow boatloads to pay for school. New schemes like “buy now, pay later” (BNPL) make it easy to get stuff we can’t afford.
It’s only later that bills – and the interest on them – come due. Even as the economy improves, our debt is increasing: 50% of BNPL clients miss payments. At the end of 2023, the average American had $7932 in credit card debt — up 25% from the end of 2022 — and we are paying down the debt more slowly: we paid $363 a month on our credit cards in 2023; compared to $421 in 2022.
Americans are highly skilled at charging things to credit cards. Paying them off? Not so much.
There’s some sunshine behind the rain clouds:
The headline I took from the Emerging Issues Forum: Americans have a big spending and saving problem. The subhead: there are smart people working to do something about it.
It’s not going to be enough to have everyone get bigger paychecks or suddenly discover austerity — our addiction is too deeply ingrained. There’s a role for educators. For corporations. For government. And it is going to take a while.
Here are three ideas that could get us started:
New kinds of “financial literacy” education: We clearly need more education about the challenges of saving and debt. US adults correctly answered fewer than half the questions on a financial literacy test in 2023. Members of Gen Z only got 38% correct. But the answer probably isn’t spreadsheets and lectures delivered by gray-haired fossils. At the Emerging Issues Forum, we heard from two different kinds of educators. Mary Esposito, a 20-year-old student at UNC-Chapel Hill who started “Money with Mary,” has 155,000 followers on TikTok and Instagram. Her approach? Chatty, informal, small chunks of “edutainment.” She talks about debt reduction strategies while putting on makeup or knitting. While discussing impulse buying, she may run a completely unrelated video in the background, or morph her face into a duck bill. The idea is to recognize that Gen Z watchers have short attention spans, and financial literacy is not an inherently fascinating subject. Tiffany Grant, the owner of “Money Talk with Tiff,” uses podcasts and blogs, Facebook and Instagram to reach her audience, mostly Gen X, and follows her readers to the places they want to go to ensure they stay interested.
Mary Esposito (left) and Tiffany Grant (center), talk with Michelle Singletary (right) at the February 12 Emerging Issues Forum. Who do you trust for your financial advice?
Flattening income “cliffs”: The US has a number of programs designed to make it easier for families to make ends meet. We can get assistance paying housing, child care, food or medical costs, and tax credits for earned income and child care expenses. But we often make it hard for people to get those benefits, requiring them to go to different agencies for each. Creating “one-stop” opportunities for people to get benefits, according to Ralph Gildehaus, a Senior Program Manager at MDC, a nonprofit based in Durham, NC, gives them more time to find work or take care of their children. But there are other fixable structural problems that provide perverse disincentives. One example: in Kansas, a family of four can collect Medicaid up to the point that it earns $39,900. One dollar more and they lose all benefits. There are similar “benefit cliffs” for housing, food and child care. Flattening the cliffs gives people incentives to make more money.
Using psychology to save: Marketers across the world look for ways to use psychology to make us spend more; Duke University’s Common Cents Lab looks for ways to encourage us to save more. Their conclusion is that we cannot fundamentally change people’s inclinations; we need to change the tools to make it easier, more attractive and more socially acceptable to save. An example: if the default option you give employees during hiring is to signup for retirement, 90% sign up. If they have to opt in to sign up, just 34% will join. Another one: the Lab found that if you gave participants in a saving fund a validation on a punch card each time they made a contribution, they saved more than those that just contributed to a fund with no external recognition.
Where do we go from here?
There’s a competition on for our financial souls: on one side is the promise of short-term easy money, immediate gratification, epic Facebook or Insta posts showing you keeping up with, or lapping, the Kardashians. Debt? It’s never mentioned.
On the other side is a long game that may involve short-term sacrifice, delayed gratification and fewer followers, but also the ability to handle emergencies — plug the roof, repair the dent, get the surgery — and, someday, retire.
The deck is stacked in the competition. We know who’s winning. How do we create new strategies to make it a fair fight?
-Leslie
Notes:
World savings rankings: https://www.finder.com/best-and-worst-household-savers
Spending patterns: https://www.cbsnews.com/news/american-economy-household-spending-higher-than-income-ap-norc-poll/#textMany20Americans20say20their20householdor20has20not20gone20away
Living alone: https://smartasset.com/data-studies/household-changes-2023#:~:text=Key%20Findings,from%2011%25%20to%2041%25.
CFPB on emergency expenses: https://www.consumerfinance.gov/data-research/research-reports/insights-from-making-ends-meet-survey-2022/
CFPB on emergency savings: https://files.consumerfinance.gov/f/documents/cfpb_mem_emergency-savings-financial-security_report_2022-3.pdf
Current state of credit card debt: https://www.cnbc.com/2024/02/22/americans-with-debt-putting-less-money-toward-credit-card-payments.html#:~:text=Spend-,Nearly%201%20in%204%20Americans%20with%20debt%20are%20putting%20less,%3A%20%27People%20are%20really%20struggling%27&text=Total%20credit%20card%20debt%20in,money%20toward%20paying%20it%20down.
Growth in cost of college and housing compared to income and inflation growth: https://www.bestcolleges.com/research/college-tuition-inflation-statistics/
Money with Mary on TikTok: https://www.tiktok.com/@moneywithmary
Money Talk with Tiff: https://moneytalkwitht.com