I am unfortunately well qualified to be writing about why people make poor financial decisions. From a young age, I have always been a spender – the opposite to my miserly younger brother. My shopping habit grew rapidly as a teenager when I started to work a job, and suddenly I’d traded in a kid’s allowance for a grown-up’s paycheck. I bought clothes and Chinese food, Christmas gifts and amusement park tickets, and didn’t save much at all. I chose an expensive private college out-of-state instead of the state school I’d gotten a full scholarship to – and took out tens of thousands of dollars in student loans. Almost immediately upon my arrival, I contracted a sickness that took me out for about 6 months – just long enough to tank my grades, and with my grades, the scholarships I’d had. I was in deep debt, with no hope of paying for a degree to get a good enough job to get out of debt, and a bad habit of spending every cent I got. So yes, I have an insider’s perspective on why people make such poor financial decisions!
I know that I’m not alone. The average American household is $139,500 in debt, according to a 2017 Nerdwallet analysis. One in four American adults have zero money set aside in savings for an emergency. And more than one in three have zero money set aside for retirement – even into their 50s and 60s! Almost 40 million American households live paycheck to paycheck, even though most of those households have an average income above the federal poverty level. Many Americans make poor financial decisions. But why? It is impossible to speak for everyone, but there are some common themes.
One factor driving poor financial decisions is consumerism. The average American lifestyle – owning a house, two cars, the latest tech; having kids and taking vacations – is expensive.They don’t want to be in debt; they feel they have to be. People spend money they don’t even have yet just to feel normal and have what they see as needs. “Keeping up with the Joneses” is killing the average family’s finances. It’s understandable – it’s hard to feel deprived or abnormal among friends, even if for a few short years to get on your feet financially before buying nicer things. Yet secretly, statistics show, it’s likely that our friends the Joneses are also deep in debt, too.
Another factor in poor financial decisions is lack of financial education. Two-thirds of Americans can’t pass a basic financial literacy test, according to a recent study by the FINRA Foundation. Without basic knowledge about how loans and interest, investing and dividends, and budgeting and saving work, how can Americans be expected to make good financial decisions? And as bad as the statistics are, when looking only at minority groups the statistics are even worse. Many Americans don’t know their options about how to reduce their debt or how to save effectively (for example, their employer may offer a matching 401k contribution they don’t even know about).
For many Millenials, an age group that typically scores very low on financial success, the financial woes start with student loan debt. The cost of tuition, associated costs of living and attendance, have increased since previous generations. At the same time, the availability and award amount of merit-based scholarships are quickly decreasing. The average amount of student loan debt is $49,000 – while the average American income is only $51,000. This means the new wave of the American workforce is starting off from the very beginning in deep debt – that’s before even having a chance to buy a place to live. This may or may not be due to poor choices by Millenials about where to attend school –
community colleges offer a lower cost alternative–and about what career field to go into so that they can make enough money to pack back loans.
There are surely a host of additional factors that contribute to poor financial decisions – lack of good financial example from parents, medical issues that put strain on the rest of the finances, simple procrastination, and others. Whatever the reasons – whether materialistic consumerism, lack of financial literacy, student loan debt, et cetera – it’s clear that many Americans, myself included, suffer from the consequences of their poor financial decisions. Feeling overwhelmed by it all, it’s easy to see why money is a number one stressor for many people.
So perhaps it’s time – or past time – to start fighting back, household by household and person by person. It’s time to increase education and options. It’s time to make better financial decisions!
Who doesn’t know Janie? She’s the one who takes our financial education mission a step further and stays in close contact with our partner Universities, platforms, and institutions. Her Marketing Studies allow her to approach every situation individually and find the greatest solutions.