April is National Financial Literacy Month. Why do we dedicate this calendar page to highlighting financial skills and education? The tax deadline? Sound financial decisions are important all year long, but most Americans never learned how to manage money or save for goals, so financial security is a bigger challenge than it needs to be.
Even if you can handle the math involved — and calculators can help if you can’t — things get complicated when making large (often emotional) financial decisions. Some of the most common pitfalls are described below. If you recognize any of them, you’re not alone. The good news is that you have an opportunity to improve your finances and save more money.
An emergency fund is essential because you need to absorb life’s surprises without making things worse. Without a stash of cash, you’ll have to take on debt — often at high interest rates — for unexpected car troubles or surprise medical expenses.
A 2018 Federal Reserve study found that 41 percent of U.S. consumers would “struggle to meet emergency expenses of $400.” Roslyn Lash, an Accredited Financial Counselor ®, has worked with clients in that situation, but there is hope. “Oftentimes, it’s not a lack of resources, it’s simply a lack of knowledge and discipline,” says Lash. She suggests paying yourself first to build up an emergency fund: make sure that your savings and other financial goals are taken care of before you allow yourself to spend money on less important items like that Frappuccino.
Retirement Savings Shortfall
Americans are dangerously underprepared for retirement. Your expenses don’t take a break when your income stops, so you’ll need a source of funds to pay for food, housing, healthcare, and all the fun you planned for your golden years.
Are we saving enough? The median nest egg for U.S. households amounts to just $71,000 according to the 18th Annual Survey by the Transamerica Center for Retirement published in 2018. That includes the 10 percent of households who have saved less than $5,000 – with 4% of households having no retirement savings at all!
“Some people are fortunate to receive pensions and others are fortunate to live simple lifestyles that can be sustained by Social Security income,” says Jennifer E. Myers, CFP®, and President of SageVest Wealth Management in McLean, VA. However, the maximum monthly payment from Social Security in 2019 (assuming full retirement benefits at age 66) is $2,861. Most people will get less than that, with the average being $1,461 per month, and it probably won’t be enough.
To avoid a nasty surprise in retirement, run some numbers. Figure out how much you’ll get from Social Security, decide if you’ll need more, and calculate how much you need to save each month to fund that goal. “Almost every American requires savings to supplement their retirement,” says Myers. To calculate your needs, try our free Retirement Planner.
Unless you understand the true costs of loans, it’s easy to borrow too much and pay interest at high rates. According to the Federal Reserve, that’s exactly what we’re doing, and household debt levels have risen to roughly the same levels seen just before the Great Recession.
ValuePenguin reports that the average U.S. household had $9,333 in credit card debt in March 2019. Add student loans of $29,800 and an auto loan of almost $30,000, and you’re talking real money. When the median household income is just over $61,372 per year, those debts seem nearly impossible to pay off, and it’s no wonder that student loan delinquencies are reaching all-time highs.