In 2019, the average American is believed to have $40,000 in debt, not including their home mortgage. And the rate of those with no debt is decreasing with each passing year. More and more people claim that they live paycheck to paycheck, and many rely on credit cards far more than experts would suggest.
For millennials, the main sources of financial liabilities include student loans and credit cards, with an average of over $22,000 in combined debt. For older millennials, that number jumps up to $42,000 or more. Baby Boomers and GenXers tend to have an average debt between $36,000 - $40,000. And with any average, there are significant outliers and some Americans are believed to have credit card and student loan debt approaching the high $90,000 mark.
The Federal Reserve has said that as of February 2019, United States consumer debt exceeded $4 trillion. Much of that is comprised of credit card liabilities, but student loans and automobile financing are not far behind. And many Americans are far over the suggested 30% utilization on their credit cards.
These staggering statistics would lead us to believe that many of us need to make changes in how we are handling our money. So, what are the biggest mistakes that people make with their finances?
Lack of a budget
This might sound rather basic, but many Americans indicate that they don't use a budget, 25% in fact. Those who take the initiative to set up a budget find that it helps them to avoid making frivolous spending decisions, and helps them to better monitor their credit card utilization.
For those looking to create a budget, a good place to start is by using the 50/20/30 method. With this approach, 50% is applied towards essential costs such as your mortgage, car(s), utilities, and groceries. 20% is then allocated towards your financial goals such as your emergency savings, retirement, and future goals. The remaining 30% is put towards lifestyle expenses such as eating out, going to concerts and the movies, and taking vacations.
If you are looking for more information on how to set up a budget, take a look at this website from Payoff.com which provides a list of five steps to create a budget.
Lack of an emergency fund
Often called a rainy day fund, a three-month or more equivalent of earnings has long been suggested by financial advisors to be kept in savings in the event of an emergency., Unexpected unemployment, unforeseen out-of-pocket medical expenses, premature death of a loved one, and countless other tragedies and stressful situations can be devastating scenarios. But with money set aside for "just in case," the burden can be lessened dramatically.
Financial secrets
According to an INSIDER Data poll, financial problems are the fifth cause for divorce in the United States, representing just over 36% of divorces. While conflicting methods for money management can be a cause of strife, so too are situations where partners do not openly and honestly discuss their spending habits. By working together with your spouse or partner to set a budget and discuss both short term and long term goals and needs, you'll do wonders for the security of your financial future and for your relationship.
Rising debt & excessive spending
As mentioned earlier, debt is on the rise in the United States. Debt is generally accrued from poor spending habits with credit cards and high interest rates. And credit card spending can be just as addictive as alcohol, tobacco, and drugs as it often creates a feeling of a high or rush. When the endorphins kick in, the euphoria is real, and when you start to come down and realize what you've done, a natural response is to go shop more to stay in the happy mindset.
Lack of a retirement plan
A recent article from The Motley Fool stated that 75% of Americans reported that they were only somewhat confident or not confident at all about their future financial health, per a survey conducted by Fidelity. Further, only 18% of survey respondents indicated that they have a written retirement plan, with the outlying 82% indicating that either they don't think a plan is necessary or have not yet created one. Fidelity offers a retirement score calculator that those without a plan, or those wondering the strength of their plan, can use to determine the financial changes they need to make in advance of retirement.
It's never too late to begin saving for your retirement. While younger Americans have an advantage as they have been able to contribute since entering the workforce, many older Americans never took advantage of 401(k) plans, largely because 401(k)s were not created by Congress until 1978.
If your employer offers a 401(k) or other form of retirement program, be sure to sign up, even at the minimal commitment. Your contributions will begin to compound over time, and many employers will offer a match up to a certain percentage of your contribution. Note that in 2019, the maximum pre-tax annual contribution is $19,000.
Making smart financial decisions starts with thinking long-term instead of to the immediate future. Going back to the 50/20/30 method, if 20% is put towards your financial goals and the remaining 80% is put towards everything else, you will be making strides to protect yourself for years to come. Also, while credit cards serve an important purpose in helping with emergencies (if and when the emergency fund dries out) and in helping to build a credit score which is necessary if you ever want financing for a home or a car, keeping an eye on your utilization rates is critical.
Leverage FICO or one of the three credit bureaus (Experian, Equifax, or TransUnion) to check your credit score monthly to stay on top of where your score falls. This regular practice will also give you line of sight into any inaccuracies in the report. If you happen to notice an error in your report, it is critical that you file a complaint right away so that the error can be ammended. Sometimes, disputes can take weeks or months to correct, and it is important to get out in front of the problem as much as possible.
