Scary Financial Statistics You Should Know (And Learn From)

“Do not save what is left after spending; instead spend what is left after saving.”

Warren Buffett

Financial literacy is the ability to understand how money works. It is a challenge for many people to make, manage, spend, and invest it for the benefit of having financial flexibility and a good life.

Growing up in a home that often struggled with money, I have had some financial success but not without self-made challenges and forced errors. The smartest people I know in the world, my husband and I included, have blind spots when handling money. Being a lifelong learner, I find no shortage of things I would like to learn.

The Importance of Financial Literacy Skills

I have either worked in the financial field on Wall Street or teaching finance to college students virtually all my career. My goal is to teach financial literacy skills to all who want to learn more through this blog. It is surprising how few financial literacy courses are in high school or even college. Yet, financial literacy is a skill we all need to learn. I always find this statistic scary: 63% of Americans got three or fewer answers (out of a five-question exam) correct on a basic financial literacy test given by FINRA Investor Education Foundation.

In writing this article, I found interesting and scary financial statistics in 8 significant areas. However, we had a dreadful year in 2020 due to coronavirus. We have had to be on zoom because of continued social distancing needs in 2021, and that maybe is the scariest fact of all.

Financial Statistics You  Should Know And Learn From In 8 Areas

 

1. Savings Should Be A Priority Starting With An Ample Emergency Fund

COVID’s impact has been devastating to many, and it has not yet disappeared. One financial lesson is clear: the need for an ample emergency fund for unexpected costs. However, saving for one is not always easy. Based on a 2018 survey by the Federal Reserve, 61% of adults would handle an unexpected expense of $400 using cash, savings, or a credit card. By paying the credit card bill in full, you won’t have interest payments.  Another 27% would only be able to cover $400 by borrowing or selling something, and 12% would not cover it.

Related Post: Why You Need An Emergency Fund And How To Invest It

The reality is that many Americans often face more significant financial difficulties than $400 when having to pay for a car repair or a medical bill.  Just 40% of adults would be able to cover the unexpected amount through savings if the cost rose to $1,000, according to Bankrate’s 2020 survey.

How Much Should You Save for Unexpected Costs?

To combat these pressures, an ample emergency fund is a “must-have” tool for households. How much should it be? It is common to believe six months of savings to pay for living expenses is a good start.  During financial crises, people may need more savings. The median duration of unemployment increased from 8.6 weeks in November 2007 to 25.2 weeks in November 2010. However, 45% of people were still unemployed 52 weeks or more in 2011 (Bureau of Labor Statistics report).

Many have been out of jobs during the pandemic through layoffs and furloughs with still high unemployment levels months later. While unemployment checks help to an extent, dependency on government resources is often folly given the politics we have seen in the latest stimulus talks.

$2,467 May Be The Magic Amount

Researchers found $2,467 in emergency savings is needed to offset a financial disaster. A study of lower-income households by the Federal Reserve Bank of St. Louis and a Chilean professor determined the amount. About 70,000 households participated with income below 200% of the poverty level.

The median household savings was $70, while a quarter of the participants had zero savings. $2,467 was out of reach for many respondents. Like skipping medical appointments, hardships rose for those who were unable to come with that amount compared to those who could. While the $2,467 sounds like a big number, it is not out of line with the need to have savings of at least six months of your living expenses covered. Savings rates tend to rise by income.

Living Paycheck-To-Paycheck

A recent survey by First National Bank of Omaha found 49% of respondents expected to be living paycheck-to-paycheck. That percentage is high as the bank completed the study in early 2020 before the pandemic impact.  Living paycheck-to-check means that your monthly expenses devour your monthly income with little to no money left for savings or otherwise.  Budgeting is a must, and 83% of the respondents expected to stick to their budget this year.

Separately, Willis Towers Watson, a leading global advisory firm, reported 18% of employees making more than $100,000 per year live paycheck-to-paycheck. Keep in mind that certain parts of the US have significantly higher living costs. Higher annual incomes don’t always stretch as much as you would think.

2. Spending Less Than You Earn

To be financially comfortable, you should spend less than you earn, not borrow to pay your debt. In 2019, annual household income was $68,703 and compared favorably to $64,036 in consumer expenditures. (US Census, Bureau of Labor Statistics)

However, overspending does exist in our consumptive society as borne by these statistics by The Credit  Examiner and multiple sources:

52% of Americans spend more than they earn.

The average American spends $1.33 for every dollar earned.

21% regularly have expenses above income.

13.5% of Americans adjust their spending the following month to get back on track.

1 in 4 has more debt than savings.

Avoid Impulse Buying

Impulse buying has been a  culprit in overspending. The average consumer spent $5,400 annually on impulse shopping pre-pandemic, often on food and dining. Valassis research found 35% of consumers consider themselves predominantly impulse spenders. As such, they tend to treat themselves to buy something unexpected as part of the experience. That tendency to impulse shop continued mostly online as spending increased by 18%  in April 2020 compared to earlier in the year (Slickdeals, Valassis).

Overspending Can Lead To Borrowing More Than You Should

To avoid overspending, understand your needs, and wants. Needs are your basic living needs such as food, shelter, medical, and education requirements. Wants are desires shaped by your personality and culture. Consider these purchases more carefully if you are overspending. Go shopping with a list and stick to it. When making purchases online, put your buys in a cart and wait hours or the next day to see if you still must have it.

Related Post 10 Ways To Better Manage Your Spending

3. Retirement Savings

The average 401K retirement plan balance rose to $112,300 in 4Q 2019, while the average IRA  amounts to $115,400. Fidelity, which has more than 30 million retirement accounts, reported some positive trends for retirement plans:

Record numbers of workplaces offered managed 401K and 403(b) tax-exempt plans, which grew to 32% of the total percentage of plans.

35% of employers are automatically enrolling new employees and at a higher default contribution savings rate of 5% or higher. They reported that employees’ contribution rate has more than doubled over the last ten years, from 9% in 4Q 2009 to 19% in 4Q 2019.

The average 401K balance and contributions vary by age group. Twentysomethings (20-29 years) have a balance of $10,500 and a 7% contribution rate, while Sixtysomethings (60-69 years) have balances of $171,400 and 11% contribution. Early in 2020, Congress removed age limits so that individuals 70.5 years or older could continue to make contributions to their traditional IRAs. (Fidelity)

Many of Fidelity’s accounts tend to be high net worth holders and may not accurately represent US households.

A More Realistic View of The Retirement Savings Landscape

The Federal Reserve Report on the Economic Well-Being of US households in 2019 tells a different story.

The median retirement savings in the US was $60,000 in 2019. While 75% of non-retirees have some money in savings, 25% of that group does not. Of those who do save for retirement, 55% had balances in an employer-sponsored 401K plan. The Fed’s survey found fewer than 4 out of 10 respondents felt that their retirement savings were on track.

Related Post: Saving For Retirement In Your 20s

4. Net Worth

US families’ median net worth in 2019 was $121,700, a better representative amount than the average net worth of $748,800. Median is the middle point where half of the families have more, and the other half have less. Average net worth is a far rosier number because it skews higher by including the wealthy top 1% as part of the group averaged into one.

The top 1% hold 34.23% of US wealth in 2Q2020, which compares to 19.46% at the end of 2007, ahead of the Great Recession. (Federal Reserve)

The net worth varies for families by income, age, race, and asset and liability composition. Having a higher income affords families financial flexibility to have better assets, notably retirement savings, investment accounts, owning a home, net of a mortgage liability. The unemployed and underemployed have trouble paying bills and borrow more, resulting in lower net worth. 

Although net worth is a commonly used benchmark, liquid net worth is a more accurate measure of what you have for big emergencies or even a business opportunity. The calculation strips out assets that may take time to monetize quickly for liquidity purposes but keeps the same amount of your liabilities.

5. Consumer Debt

Total consumer debt held by US households in 2Q 2020 was $14.23 trillion, including $9.78 trillion in mortgage debt. (The Federal Reserve) The CARES Act benefited those holders of debt–mortgages and students, allowing for delays in payments.

Car Loan Debt

Total car loans were 1.2 trillion at the end of 2019, or 9.5% of American consumer debt.

Americans borrowed $32,480 for new cars and $20,446 for used vehicles.

Average monthly car payments vary by plan, with $550 for new vehicles, $393 for used cars, and $452 for leased vehicles.

The average APR was 8.06%. The rate often differs by the length of term and credit scores. For those with the highest credit rating, the borrowing was 5.66% compared to 21.54% for borrowers with poor credit.

Late payments of 90 days amount to 4.5% of outstanding debt.

The average loan length of term for new cars was 69 months, 35 months for used vehicles, and 37 months for leased vehicles. The longer the length of time, the greater the amount of interest paid on your purchase.

The Length of Your Loan Matters

Typically, the longer the term of your car loan or mortgage, the higher the amount of interest you will be adding to your purchase. The most extended car loan you used to be able to get was 60 months. Length creep has been pushing upwards as some lenders have offered 84 months or more. That’s just nuts. Buy a used car or a small car if the monthly payment is too much to handle. We recently bought two used certified pre-owned late-model cars to avoid taking on new debt.

Longer mortgages of 30 years remain more common than 15-year loans. The buyer should not ignore the substantially higher interest you are paying for the purchase of the home. Increasingly there are term lengths of 20 years and ten years that lenders may attract homeowners. Here is an example of the financial implications of a 30-year mortgage versus a 15-year mortgage.

Financial Implications For 30 Year Mortgage versus 15 Year Mortgage

When comparing the different loan maturities on a $300,000 loan:

  • The APR will be higher for the 30-year mortgage than a 15 year one, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15-year mortgage, given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you pay less in total interest.
  •  Assuming you have a 720 credit score, the total home price, including total interest paid and down payment, will be lower with a 15-year mortgage loan.
  • The 30-year mortgage is much higher because you are paying interest on your loan longer, so the total home price or principal is $375,000 plus $189,622 equals $564,620.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $76,012 in total interest equals $451,012 for principal and interest.

Housing and Mortgage Debt

The housing market has been a good story despite coronavirus. It has been a significant beneficiary of our economic recovery since the Great Recession. Recent mortgage statistics reflect a still strong recovery despite the remaining high unemployment levels impacted by the pandemic this year. Housing purchases are at strong levels as consumers are attracted to historically low mortgage rates. However, the longer the economic downturn from COVID, the more vulnerable these statistics are.

Total outstanding mortgage debt was $9.78 trillion at the end of 2Q 2020, accounting for the largest household expenditure at  68.7% of total consumer debt. That makes sense, as owning a home is often our largest asset.

The average mortgage loan rate was 3.84% (Federal Reserve Bank of St. Louis). That rate is historically low.

78% of homes sold have a mortgage, with the remaining 22% in cash. This result was due to more cash sales than in the past.

2.63% of homeowners in the US have mortgages.

The new mortgage loan balance is $260,386.

 

An average down payment is 6%, which is below the traditional down payment of 20%. (Smart Asset) I found this statistic particularly disturbing. Apparently, bankers have been accepting down payments as low as 1%. “History doesn’t repeat itself, but often rhymes” is appropriate whether it was Mark Twain or not.

Could It Happen Again?

Small down payments are too reminiscent of the housing debacle that caused the Great Recession of 2008-2009. Then, bankers made mortgage loans, including the toxic sub-prime mortgages, relaxing requirements on credit histories, and down payments. They justified the lower down payment requirements based on the rising housing prices. We all know what happens when housing prices stopped rising and housing values crashed in 2008-2009? BOOM!  Today, housing is healthy. But, we have high unemployment and a mixed economic outlook so that a healthy housing market can change the longer the recovery takes.

The share of homeowners with a mortgage at 62.9% in 2019 is among the lowest in recent years. (Urban.org)

Mortgage debt-to-home value for residential real estate peaked at 63.3% in 2009 to 1Q19. This improvement was due to an aging population, tighter credits by the banks, and more cash sales. (Urban.org)

A survey by MBA found that the delinquency rate for mortgage loans on one-to-four family unit residential properties increased to a seasonally adjusted rate of 8.22% of all outstanding loans at the end of 2Q 2020. This rate is a nearly four percentage point jump in delinquency, the most significant quarterly rise in the survey’s history.  The COVID-19 pandemic is hampering some homeowners’ ability to make their payments.

Barriers Remain For Many Potential Homeowners

Although mortgages are low, there are three main barriers to owning a home for first-time homeowners:

68% of renters cited saving for a down payment as a significant obstacle. Many renters are unaware of low down payment programs. (Urban.org)

Access to credit, while looser now since 2008, remains tight. The median score for originating mortgages is 759 as of 1Q2019. That is well above the 696 scores in 2005 (Federal Reserve Bank of New York). That doesn’t mean that you couldn’t get a loan if you have a credit score below 700. However, it may be at a higher borrowing rate putting it out of range for many.

Affordability of homes is a factor as home prices rose in 2020. The landscape during COVID has changed with more people leaving urban environments, so it would not be surprising to see less inventory and higher down payment requirements.

Student Loans

Recent outstanding student debt was  $1.67 trillion in federal and private debt with about 45 million borrowers. Private loans account for 7.87% of the total student loans (NerdWallet).

69% of college students took out student loans, graduating in 2019 with an average of $29,900 of private and federal debt.

The average student loan debt is $32,731, with a $393 monthly payment.

The median student loan debt is $17,000, with a $222 monthly payment.

11.1% of student loans are 90 days or more delinquent or are in default.  (Student Loan Hero).

Seniors With Student Debt

Over 3 million people age 60+ still have student debt. Of those, 40,000 seniors owe an average debt of $33,800, up 44% since 2010. Those with student debt will be unable to college tax refunds, social security benefits, and other government payments. The government will garnish these amounts. Potentially losing these benefits is a harsh result for those who are at or nearing retirement. Perhaps it is time to forgive these loans. Roughly 1 in 7 people who file for bankruptcy are 65+ years old, an almost 5-fold increase since 1991 (The Consumer Bankruptcy Project).

Credit Card Debt Can Be Toxic

Credit card debt at $0.82 trillion of total consumer debt in 2Q2020 reflects a steep decline from borrowers owing more than $1 trillion at the end of 2019. This drop is likely due to COVID-related factors, which resulted in lockdowns, high unemployment, and more savings.

The US personal savings rate–personal saving as a percentage of disposable personal income–peaked at a historical rate of 33.7% in April 2020, up from 7.6% in 2019. As job losses remain high after peaking in March and April, the personal savings rate was still above previous rates at 14.1% in August 2020. (US Bureau of Economic Analysis)

Credit card debt is a relatively small part of total consumer debt. However, credit cards, if misused by users, can be far more financially lethal.

Credit Card Statistics:

If used properly, credit cards can be a useful tool for its convenience and ability to not pay for things with cash during COVID. Paying your monthly card bills in full enhances the cards’ benefits without the downside. See our related post on the Pros and Cons of Credit Cards.

6. Credit reports and Credit Scores

It is essential to review your credit report at least annually. The Federal Trade Commission did a study and found one in five people have an error on at least one of their credit reports. Related Post: 6 Ways To Raise Your Credit Scores

1 in 5 Americans aged 20-29 don’t know their credit scores.

More than 29.8% of Americans have a credit score of 680 or better.

Nearly one in two people don’t pay off their credit balances each month.

51.2% of Americans renting property do not know they can report utility and rent payments to improve their credit scores.

 

7. Investing As A Means To Wealth

Investing early and even in small amounts will be beneficial for you in the long term. Yet, many people have remained on the sidelines. There are a variety of reasons for not investing in the stock market. When stocks dropped significantly in March 2020 due to the coronavirus, it ended the longest bull market, replaced by the bear market, which proved short-lived as stocks bounced back.

Although the stock market is subject to volatility, I remain steadfast in my belief that if you have savings, can pay your living expenses, and have a long-term investment horizon, investing is where you should be. That said, you should learn as much as you about the market and be financially disciplined.

Related Post: 10 Tips To Diversify Your Portfolio

According to CNBC, 61% of adults say they find investing in the stock market to be “scary or intimidating.” Millennials feel more intimidated than either Baby Boomers or Generation X. That is probably why only 1 in 3 Millennials invest in stocks.

However, over 66% of Millennials are interested in learning how to invest. 61% of this generation believes that this is a good time to invest based on a survey by Money Under 30.

The share of adults investing in the stock market has declined from 65% in 2007 to 55% in 2020. (Statista)

In a March 2020 survey, over one-third of adults reported they were less likely to invest based on what they knew of the coronavirus. Only 12% of respondents said they were more likely to invest. (Statista)

Robinhood’s Accounts Grew During COVID

Countering some of this decline in interest in investing is Robinhood’s growth to over 13 million accounts in May 2020, in part due to COVID. Robinhood is a popular app and website for investing and trading, particularly for individuals in their 20s and 30s. They are known for zero-based commissions except for purchases on margin. Customers have to pay $5 per month for the opportunity to borrow money from Robinhood. Their platform is designed for simplicity for users to get up and running quickly. Criticisms of Robinhood are associated with outages and security, both of which the company has been fixing.

A Fun Fact

More Americans own cats than stocks. Really. While 13.8% of American families own stocks directly (as opposed to mutual funds, for example), 25.4% own at least one cat. (Federal Reserve, American Veterinarian Medical Association).

8. Estate  Planning

In a 2020 Caring.com survey, 30.4% of respondents say they don’t have a will because they don’t have assets to leave anyone.

24% fewer people have a will than in 2017.

Many beneficiary designations are out of date, a common and costly mistake. IRS statistics show that beneficiaries cash out six months after the death of the person who designated that money. Many beneficiaries are losing the compound benefits by cashing money out rather than rolling over the asset and perhaps paying taxes and penalties. We address tips on how to handle designated beneficiaries better here.

Other Financial Facts To Know

85% of people don’t like their jobs, according to a Gallup global poll pre-COVID. Only 15% of people are engaged in their careers.

Do You Want To Be A Millionaire?

7% of households in America are considered millionaires.

The average millionaire filed for bankruptcy 3.5 times. President Trump is in good company. Although he hasn’t filed for bankruptcy personally, his businesses have six times.

Only 20% of millionaires inherited their wealth. The other 80% earned their money on their own. (The Millionaire Next Door)

Final Thoughts

In this post, we reviewed many key areas of financial literacy backed by financial statistics. We tried to make relevant points on how we may improve our money management skills by learning. The coronavirus has certainly added to the many financial challenges people face. Taking one step at a time, we can improve our financial discipline by saving more, spending less, participating in retirement plans at work or on our own, and have an estate plan. With more savings, we should have an emergency fund and start investing in the stock market if you haven’t already.

Thank you for reading!! If you found this of value, feel free to share and subscribe to The Cents of Money.

 

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