The Deceptive State of Americans’ Finances

It’s a family tradition during the holidays to acknowledge our blessings and express thanks for the many opportunities and privileges we have. Despite recent stock market volatility, there’s still so much to be grateful for, and there are some indicators to support an optimistic future:

• The forecast for holiday spending this year reflects strong consumer confidence in the economy. Americans are projected to increase spending this season by almost 6%, spending more than $1 trillion, marking the strongest growth since 2011.[1]
• The unemployment rate fell to 3.7%, the lowest since December 1969, and appears to be holding steady.[2]
• More American households are participating in traditional financial services. The number of U.S. households without a bank account fell to 6.5% in 2017. The FDIC attributes this to improvements in the socioeconomic circumstances of U.S. households.[3]

The future looks bright – but looks can be deceiving. Underpinning this cheery outlook is a dark secret about Americans’ financial state. A new study from the Center for Financial Services Innovation (CFSI) reports only 28% of Americans can be considered financially healthy. CFSI identified other troubling signs:

• Nearly half said their spending has equaled or exceeded their income in the last 12 months.
• 44% rely on credit cards to make ends meet.
• Only 45% have enough to cover three months of living expenses.
• 42% have no retirement savings.
• 30% have more debt than is manageable.[4]

These statistics mirror other research studies. Seventy-eight percent of American workers are living paycheck to paycheck, and 71% report being in debt. Of those in debt, 56% say they believe they will be in debt for the rest of their life.[5]

Another in-depth report by Nonfiction Research called “The Secret Financial Life of Americans” paints a disturbing picture of financial insecurity for many Americans. The report states 37% of Americans have gone to sleep hungry because they didn’t have money. What’s worse, 5% admit to having taken half-eaten food out of a garbage can.[6]

This data reveals a deception exists behind the happy portrait of conspicuous consumption and prosperity plastered across Americans’ social media. The “Secret Financial Life” report asserts that privately, behind closed doors, “a staggering number of Americans are leading double lives when it comes to money.” Many Americans are financing the visible parts of their lives by draining their savings and running up debt, activities which may feel good in the short term but over time, exacts both a financial and an emotional toll. According to the American Psychological Association, 62% are stressed about their finances[7]; a Varo Money report says 30% are “constantly” stressed about their finances.[8] People from across the socioeconomic spectrum are affected; even highly compensated workers are not immune to the emotional impact of financial stress.[9] 

The effects of financial stress have a broader societal impact. There are negative consequences for the individual’s employer. Work-life spillover results in increased absenteeism and decreased productivity. Ten percent of employees report their financial situation had a “damaging effect on their work performance”; employees experiencing financial strain are 10% to 30% less productive than an average employee.[10] Financial stress can also result in health issues and negatively affect relationships.

As financial professionals, do we have a responsibility to ensure we’re doing our part to help our customers achieve financial stability? Obviously, there is no one single silver bullet or an easy answer; we can’t solve issues beyond our control, like insufficient income or lack of cash flow. But, as a famous Chinese proverb says, a journey of a thousand miles begins with a single step. Here are just a few potential approaches, that when taken together, can become effective tools for bolstering financial stability.

• Financial literacy and money management training Despite the disheartening picture, there is good news. People are open to help to improve their financial management skills. Nonfiction Research encourages financial institutions (FIs) to create a role for a “Personal CFO,” a money coach for everyday consumers. This single point of contact would be the equivalent of a personal trainer for fiscal fitness. Benefits for FIs include increased customer trust and engagement, and possibly new revenue streams and upsell opportunities.[11] More than eight out of 10 Americans want advice from their FI on how to reach their financial goals[12] and many are willing to pay for these services from their local FI.[13]
• Tools for managing money effectively and avoiding financial missteps It’s hard to believe it has been more than three decades since Intuit launched the first mass-market personal financial management (PFM) tool.[14] Many FIs today offer PFM; however, these tools must evolve with consumer expectations for digital engagement. To deliver on the promise of PFM, these systems need to be purposefully designed for personalized actionable engagement, incorporating the most current technological advances such as artificial intelligence. PFM should make it as easy as possible for users to anticipate issues and opportunities and take early action.[15]
• Automate savings habits The Federal Reserve found 44% of Americans can’t cover an unexpected $400 emergency expense.[16] More than two-thirds of households have less than $1,000 in savings.[17] An unexpected car repair or medical emergency can become a destabilizing crisis. Solutions like Acorns, Qapital, and Digit[18] that make saving easy, and programs that build savings by rounding up purchases to the next dollar, can help people build nest eggs, reducing the likelihood that an emergency becomes a financial disaster. Another way FIs can help is removing roadblocks to saving, such as waiving large minimum deposits to open savings accounts for customers that sign up with a direct deposit.
• Small dollar loans U.S. consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000[19], and spend more than $30 billion a year to borrow small amounts of money from lenders outside the banking system.[20] Payday loans, which in the short term may feel like a financial lifeline can turn into financial quicksand, creating a cycle of debt due to triple-digit interest rates. In The Unbanking of America: How the New Middle Class Survives[21] University of Pennsylvania professor Lisa Sevron discovered the reasons people use payday lenders include lack of access to credit and transparency of fees. Yet given the choice, more than 80% of payday loan customers would prefer to borrow from their FI.[22] Recent regulatory changes now make it more feasible for FIs to offer affordable, small dollar loans. In May, Comptroller of the Currency, Joseph Otting, called for FIs to step into the short-term, small-dollar installment loan market.[23] An additional benefit – payments on these loans would be reported to credit bureaus, helping customers establish a successful track record of repayment.[24]

As today’s FIs strive to secure their future position in their customers’ lives, it will take more than leading-edge technology (which are already table stakes.) Re-imagining the definition of customer-centricity should include tackling these tough problems with powerful, effective solutions. FIs that fail to heed this clarion call run the risk of being displaced by non-traditional providers which successfully address these customer pain points. FIs that offer help and hope have an opportunity to make an indelible imprint on their customers’ lives, earning their customers’ loyalty and trust.

[1] https://qz.com/1452783/us-holiday-sales-2018-to-exceed-1-trillion-for-first-time/

[2] https://www.wsj.com/articles/u-s-unemployment-rate-falls-to-lowest-level-since-1969-1538742766

[3] https://www.wsj.com/articles/u-s-unbanked-population-continues-to-fall-1540316543?shareToken=st54657eac91944d7a893d21fc8bac26d3&ref=article_email_share

[4] https://www.fastcompany.com/90259879/despite-the-good-economy-only-28-of-americans-are-financially-healthy 2/5

[5] http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey

[6]https://static1.squarespace.com/static/5a7b43aacf81e0ba3c790ef0/t/5b6b47370e2e72c54d11e208/1533757256119/Nonfiction_TheSecretFinancialLivesofAmericans.pdf

[7] https://www.bankrate.com/personal-finance/motivate-yourself-to-improve-finances/?pid=email&ic_id=3449936&omhide=true&brid=8824264&ttcid=3449936&utm_campaign=bankrate_weekly_20181109&et_cid=3449936&et_rid=71747904&utm_medium=email&utm_source=email_newsletters&

[8] http://www.prweb.com/releases/2018/03/prweb15293756.htm

[9]https://static1.squarespace.com/static/5a7b43aacf81e0ba3c790ef0/t/5b6b47370e2e72c54d11e208/1533757256119/Nonfiction_TheSecretFinancialLivesofAmericans.pdf

[10] http://www.employment-studies.co.uk/pubs/summary.php?id=464

[11] https://thefinancialbrand.com/75310/american-money-management-trends/

 12 https://thefinancialbrand.com/75310/american-money-management-trends/

[13]https://static1.squarespace.com/static/5a7b43aacf81e0ba3c790ef0/t/5b6b47370e2e72c54d11e208/1533757256119/Nonfiction_TheSecretFinancialLivesofAmericans.pdf

[14] https://thefinancialbrand.com/73741/personal-financial-management-pfm-artificial-intelligence/

[15] https://thefinancialbrand.com/73741/personal-financial-management-pfm-artificial-intelligence/

[16] https://www.federalreserve.gov/newsevents/pressreleases/other20170519a.htm

[17] https://static1.squarespace.com/static/5a7b43aacf81e0ba3c790ef0/t/5b6b47370e2e72c54d11e208/1533757256119/Nonfiction_TheSecretFinancialLivesofAmericans.pdf

[18] https://www.bankrate.com/banking/savings/set-aside-your-spare-change-with-these-money-saving-apps/

[19] https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html

[20] https://www.americanbanker.com/opinion/momentum-is-building-for-small-dollar-loans?utm_campaign=bankthink-c-Sep%2013%202018&utm_mediu…

[21] https://www.amazon.com/gp/product/0544602315/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&tag=ttg04-20&camp=1789&creative=9325&linkCode=as2&creativeASIN=0544602315&linkId=903e3663b6dadbb5bfc96f7098cab38f

[22] https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/04/payday-loan-customers-want-more-protections-access-to-lower-cost-credit-from-banks

[23] https://www.usatoday.com/story/money/personalfinance/2018/06/12/neighborhood-bank-may-now-offer-short-term-small-dollar-loans/691259002/

[24] https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html