A Peek Into America’s Pocketbook Reveals Finances Are Improving Slowly, But Surely

By Annamaria Lusardi and Geraldine Walsh
Annamaria Lusardi is academic director of The George Washington University’s Global Financial Literacy Excellence Center. Geraldine Walsh is President of the FINRA Investor Education Foundation.

Today’s release of the latest National Financial Capability Study shows that we’re doing better protecting ourselves against financial emergencies than in the past. We’re also doing a better job cutting our high-interest debt than previously. Yet our personal finances, particularly the amount of debt we’re taking on, is still troubling.

Photo by Vladimir Solomyani on Unsplash

The first FINRA Investor Education Foundation survey of American adults’ financial capability was undertaken in 2009, in consultation with the U.S. Department of the Treasury and the President’s Advisory Council on Financial Literacy. In this latest wave, we update prior surveys and offer new and timely information about student loans, medical costs, retirement savings, and many other topics.

FINRA’s newest report focuses on several important aspects of personal finance and identifies progress as well as room for further improvement.

Americans did well in boosting their emergency or “rainy day” savings. Seven years ago, only about one-third of the population had sufficient funds to cover three months of expenses in case of sickness, job loss, economic downturn or other emergencies. This year, almost half (46 percent) now has set aside emergency funds to cover three months of spending.  So the good news is that more individuals are better positioned to face adversity.

But the bad news is that most Americans are still vulnerable to shocks. We measure financial fragility by asking respondents how confident they are that they could come up with $2,000 within 30 days, in the event of an unexpected need.  In 2012, 56 percent said they could or probably could come up with that amount of money. Today the fraction is up, but still stands at only 62 percent. In other words, many Americans are still financially fragile, several years after the end of the financial crisis and Great Recession.

Since college tuition and fees have risen faster pace than wages and inflation, this makes it ever-more crucial to plan and save for college. Fortunately, 41 percent of respondents today are setting money aside for their children’s college education, up from 31 percent in 2009. This shift in financial planning is much needed, given how much student loans weigh on Americans’ personal finances. Moreover, almost half (45 percent) of respondents age 18-34 report they carry student loans and this debt is a source of worry. In fact, half of people with student loans are concerned about how they will able to pay these off.

Americans have been doing better regarding other types of debt and borrowing such as credit cards. We all know that paying your credit cards off in full each month is critical, and the percent of us that does so has risen to 51 percent, up from 41 percent seven years ago. Even better news is the fact that “expensive” behaviors, like paying only your credit card minimum, incurring fees for late payments, exceeding your line of credit, or using credit cards for cash advances, are on the decline.  Despite this good news, two-fifths of us (39 percent) still engage in at least one of these expensive behaviors with credit cards, at present. These behaviors are costly and can get us into financial trouble, quickly.

In all, our latest peek into America’s pocketbook confirms that the overall economy is recovering. Yet peoples’ financial situations – while getting better – are improving only slowly.  This matters since weak personal finances leave us vulnerable to future economic shocks. In turn, this can undermine our nation’s economic strength.

Without a doubt, the National Financial Capability study’s latest findings underscore the need to boost Americans’ financial capability. If you’re curious, you can test your financial literacy with our online quiz.


This piece was originally posted on July 12, 2016, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.