Financial Planning

"I don't like money, actually, but it quiets your nerves."

                                                                                                                Joe Louis, World

                                                                                           Heavyweight Boxing Champion

The Federal Reserve released a report about 10 days ago on the financial status of American households, based on a survey done last September.  The report suggests that many of us are ill-prepared for the future.  

Here are some of the findings:

     -- "Only 48 percent of respondents said that they would completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money."

     -- "39 percent of respondents reported having a rainy day fund to cover three months of expenses." (Apparently 61 percent did not have such a fund.)

     -- "24 percent reported having education loans (personally or for relatives) with the average amount ... $27,840... (Of these), 18 percent with debt for their own education ... were behind on payments for these loans or reporting that they had loans in collections."

     -- "Almost half of respondents had not planned financially for retirement, with 24 percent saying they had given only a little thought to financial planning for their retirement and another 25 percent saying they had done no retirement planning at all."

     -- "31 percent of respondents reported having no retirement savings or pension, including 19 percent of those ages 55 to 64, and 25 percent didn't know how they will pay their expenses in retirement."

     -- "34 percent of respondents reported going without some form of medical care in the prior 12 months because they could not afford it."

     --- "43 percent of respondents reported that they could not afford to pay for a major medical expense out of pocket, and 34 percent reported that it is only somewhat likely that they could afford to pay." (Apparently only 23 percent could deal with a big medical bill.)

     -- "31 percent of respondents had applied for some type of credit in the prior 12 months.  One-third ... were turned down or given less credit than they applied for.  (Another) 19 percent of respondents put off applying for credit because they thought they would be turned down."

In addition, only 55 percent of people reported saving any money at all in 2012.  The median savings for the whole population (half saved more, half saved less) was 2 percent of income.  Those who did save during the year put aside an average of 9 percent of their income.  This suggests that people with high incomes saved quite a lot, and those with lower incomes saved nothing, or very, very little.

Hard Times

The Fed's research aimed to give a picture of people's financial situations following the Great Recession.  The last six years have been difficult ones for almost everyone, some more than others.

The stress of knowing you cannot afford a $400 car repair or pay the high deductible on a bronze ACA health insurance policy wears on people.  It makes for anxiety and lost sleep.  It can take a toll on the immune system and overall health.

Other reports published recently suggest that as many as 10 percent of American adults are "unbanked," that is, have no bank account of any kind.  I assume they get their payroll checks cashed, for a fee, at payday lenders' storefronts and that they load money onto debit cards and try to make it last from one pay period to the next.  My guess is they depend on their families, and their families on them, when hard times arise.

When you think about it, it takes a certain level of financial sophistication to manage personal affairs -- to save for the deposit on a rental apartment or a home mortgage, to deal with health insurance copays, to plan for direct deposits for your employment checks, to manage credit card accounts, to know how much to set aside in savings and where, to negotiate to when buying a car.  

According to the Fed's research, even many of the people who understand all those things are having a hard time making ends meet five years after the end of the recession.  

Said another way, some combination of low economic growth, poor planning or simple bad luck has left millions of us without the sort of financial cushion that Joe Louis would say "quiets your nerves."