Americans, and their nest eggs, have been on a wild ride over the past few weeks. With the long bull market giving way to a potential bear market and the economy slowing to a near-halt as businesses shut their doors, understanding how we spend, save, and make decisions around our money is more important now than ever before.
We ran this survey just a couple of weeks before the coronavirus-induced triggered a stock market meltdown, ending the longest bull market in history. It’s very easy to think, when you’ve grown accustomed to the market going straight up for over a decade, that the trend will continue that way forever. This is one way your brain can trick you into making money decisions that might hurt your long-term financial health. There’s even a term for this among investment and financial professionals — “recency bias.” While the economy was booming, analysts indicated that many Americans couldn’t afford a $1,000 emergency, nearly half were working a side hustle in addition to their standard jobs, and a growing number of older employees couldn’t afford retirement in 2019. So, we wanted to know why, during a period of unprecedented economic growth, were Americans so ill-prepared for an inevitable drawdown, like we’re experiencing now?
For a more intimate look at the state of American finances, we surveyed over 1,000 people about what it would take to feel comfortable about money, where they get financial advice, and how many make their situation seem more affluent than it really is.
What we found is that many people’s financial health is less stable than it may seem, and that many Americans are forgoing professional financial advice.
So what can we learn from these results in our current, much more uncertain, economic environment? Well, it shows us some habits that may have felt relatively low-risk during a strong economy suddenly may seem high-risk during a period of economic contraction. So now’s the time to hit the reset button when it comes to our financial health. But how can we learn from our actions during a bull market to better prepare for a bear market?
The Savings Gap: Are Americans Saving Enough for a Bear Market?
By nature, a financial emergency can happen when you least expect it. More than having savings set aside for future investments or even retirement, we generally recommended that you keep at least three to six months’ worth of living expenses put away in the event that your income is suddenly disrupted or a rogue expense suddenly crops up. This is more important now than ever, with the economy teetering on continuing coronavirus concerns. Does the number that our survey respondents state they need to feel “comfortable” correlate with being able to support their monthly expenses in the event of a job loss?
When asked what they needed to feel “financially comfortable,” the average American identified needing $86,000 in savings, on average, and an annual salary of $68,000. More than half of those surveyed indicated that less than $50,000 in savings would still make them feel financially comfortable, while roughly 20% indicated they needed more than $200,000 to feel that way.
The average American Household spends about $5,102 per month, so if that level of spending were to continue, then $86,000 in savings would indeed be enough for a healthy emergency fund. So, Americans are right on target with their expectations for financial comfort there.
Comfort is one thing, but wealth is another. What does it take to feel genuinely wealthy? On average, respondents identified needing an average annual salary of $137,000 and $385,000 in savings to consider themselves well off.
What do you think? Do you agree with our survey respondents on what you’d need to feel comfortable, and what you’d need to feel wealthy? Have your answers to these questions changed since the start of the coronavirus?
Who Will We Turn To in a Downturn?
Whether it’s how to spend your money or how to save it, you can find financial advice on virtually every corner of the internet. So who are most Americans turning to for recommendations on what to do with their money?
Nearly 4 in 5 Americans (78%) indicated getting financial advice from their family members, while half had friends or spouses offering counsel on how to manage monetary assets. Compared to 92% of Americans getting advice from friends, family, or their significant others, roughly 1 in 4 respondents received information from a financial advisor (22%).
When we’re in the midst of a long-running surge in the economy, it can seem like you might be able to save a little by managing your own money and getting the occasional advice from those close to you. After all, when jobless rates are at historic lows and the stock market grows almost 340% over a decade, it can seem easier to invest, save, and make progress towards your financial goals. But one of the biggest pitfalls of forgoing financial advice in a period of stability is that you will likely be at least somewhat underprepared for when times get a little tougher.
After all, your family or your spouse probably aren’t able to rebalance your portfolio, check for asset bubbles, and make sure you are well-diversified. They also probably can’t give you advice on your retirement funds, or how much cash you should have on hand. What about balancing contributions to your retirement accounts with paying down debt? Saving for your child’s higher education? These things might not seem as urgent during a long bull market, but the lack of a solid financial plan can have a major negative impact on your finances when difficult times inevitably happen.
Despite so frequently turning to people in their inner circles for monetary advice, nearly 2 in 5 Americans said their friends made them spend more money than they would have on their own, followed by their significant others (23%) and relatives (12%). Another 13% of respondents admitted that their significant other or spouse jeopardized their financial well-being, and 16% said either their friends or significant other made them spend over their budget.
Many of those surveyed, 45%, acknowledged feeling pressure to earn more money than they currently do, including from their family members (30%), friends (19%), and spouses or significant others(13%).
This is another reason why it’s so important to work with a professional financial advisor, especially when times are tough. Money is highly emotional — it’s our life savings, what allows us to support ourselves and our families. When something unexpected and financially damaging — like the coronavirus pandemic — happens, it can be difficult to avoid making changes to our financial habits based on fear and emotion. We may be tempted to sell off our equity positions and sit in cash, or start putting more expenses on credit cards, or stop contributing to our retirement funds.
These are all choices that can feel totally natural when we’re frightened, but ultimately could end up damaging your long-term financial health. And family, friends, and spouses all have some “skin in the game” as well — they are emotionally invested in you and sometimes, your finances may be intertwined to some degree. That’s why it’s best to remove emotion from the equation altogether by working with a financial advisor who can be a third-party, and make objective decisions for your money that will be in your best interest.
Were Americans Living Within Their Means Before the COVID-19 Crash?
Something else that can happen during long periods of economic stability is a phenomenon called “lifestyle creep.” This means that as you start to earn more or feel more financially comfortable, your lifestyle also starts to get more expensive, sometimes growing beyond the level that you’re actually financially comfortable with. One of the best ways to recession-proof your finances is simply to live within your means. But were Americans taking that crucial step to protecting their financial health before the 2020 bear market?
Just over 1 in 3 Americans (37%) indicated their lifestyle accurately reflects the amount of money they make. In contrast, another 1 in 3 believed their income couldn’t be determined from their lifestyle; more than 1 in 10 admitted their habits implied that they make more money than in reality; and roughly as many said their lifestyle painted a picture of earning less.
People who identified being uncomfortable with their financial situations were more likely to present themselves as having more money to spend than was accurate. Roughly 1 in 5 people who were uncomfortable with their finances reported being unsure how their lifestyle was perceived by others. Financially uncomfortable respondents were also 20 percentage points less likely than financially comfortable respondents to believe their spending or savings habits reflected the honest truth of their financial standing.
Even if their overall lifestyle doesn’t give off the aura of being better off financially than they really are, 1 in 3 Americans admitted to doing something, at least occasionally, that gives the impression of earning more money than they do.
Of those who acknowledged giving off the impression of higher wealth, more than half (56%) bought items they couldn’t afford, paid too much at restaurants (39%), went into debt to buy something they couldn’t afford (38%), or picked up a check they couldn’t afford (37%).
In some cases, Americans admitted to extravagant purchases that fell outside their standard budgets. Roughly 1 in 3 who’d done something to appear more wealthy took a trip they couldn’t afford, 1 in 5 purchased or leased a car outside their price range, and 1 in 6 rented or bought a home they couldn’t afford.
What may have felt relatively low-risk during times of economic stability (like going to nice restaurants when maybe money was tight that month, or leasing a car that was a bit out of budget) may look higher-risk in hindsight now that many of us are experiencing uncertainty when it comes to our financial futures. One of the best things you can do to improve your financial health in any economic climate, but particularly during difficult times, is take a critical look at your spending and see if there are places you could downsize or make reductions so your budget stretches farther and you have more money to contribute to your emergency fund.
For example, if you bought a car that was a little more than you could actually afford, maybe consider selling it for a cheaper option. If you ever went into debt to buy things you couldn’t afford, now is also the time to aggressively try to pay down high-interest debt. High-interest debt (like credit card debt) can be a millstone around your neck in tough financial times and sink your monthly budget.
Money can be a big source of friction in our personal relationships, so it’s no surprise that many of our survey respondents are not always forthcoming with the people close to them. But when it comes to weathering a bear market, it’s crucial to be forthcoming with your spouse. If you have debts or other financial details that you haven’t shared — it’s not too late. It’s important to get everything on the table so you can have an honest conversation about the state of your finances as a couple.
Despite being in a more serious relationship, 18% of Americans acknowledged lying to their spouse or significant other about their salary or financial situation. Additionally, more than 1 in 4 Americans (27%) lied about their salary or financial status to their friends (60%), family (44%), co-workers (32%), or someone they were dating (25%).
The Solution? Better Money Management
Americans have vastly different ideas about what it takes to feel comfortable with their financial standing. While a majority receive advice from friends, family, and significant others on how to spend or save, many also acknowledge giving off the appearance of making more money than they actually do and making purchases to aid the impression of false wealth. And very few Americans receive counsel from a financial advisor. So, will Americans learn from these financial habits and make positive changes in the future?
A plan to take control of your money can involve several things, but it should involve knowing exactly where you stand financially and ensuring that you’re receiving honest, constructive advice. At Personal Capital, we want to help you with both. Our fiduciary financial advisors are here to help you create and stick to a plan tailored for your long-term goals, in prosperous economic times and harder ones. Our free financial tools will help you set up and track your budget, manage your finances, plan for retirement, and see a complete 360-degree view of your money. These free tools are designed to help you see all of your money in one place, so you can be sure you’re on track to meet your goals. Start planning the smart way at https://www.personalcapital.com/sign-up/ today.
For this project, we surveyed 1,000 Americans via Amazon Mechanical Turk. Respondents’ ages ranged from 18 to 74, and the average respondent’s age was 35. Respondents’ annual incomes ranged from less than $10,000 to $90,000 or more (over 20% of survey participants).
Please keep in mind that the data found on this page rely on self-reporting. There are some issues with self-reporting, including exaggeration, lying, and randomly selecting responses. To help prevent this, attention-check questions were added. Any participant not correctly answering an attention-check question was eliminated from the survey, along with those determined to falsely answer a question.
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