How’s Your Financial Health? CFPB Survey Says America Needs Work.

So you want to avoid financial problems in 2018? Fear not, Uncle Sam is on the case.
The Consumer Financial Protection Bureau has come out with a first-of-its-kind survey on America’s financial state of mind. It’s called the National Financial Well-Being Survey.

One finding is that a lot of Americans don’t have much financial well-being. Slightly more than 43% of consumers say they struggle to pay bills, and 34% said they experienced material hardships in the past year. Those hardships include running out of food, not being able to afford a place to live, or not having enough money to seek medical treatment.

How can you avoid such misfortune? Make more money!

If only it were that simple. Despite what you may have heard on late-night infomercials about flipping houses and owning your own pizza franchise, there is no quick route to Easy Street.

The CFPB survey gauged the many ways people reach (or don’t reach) financial well-being. Before we get to specifics, you may be wondering what exactly “financial well-being” means.

The survey defines it as “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life.”
The CFPB survey asked consumers 10 questions and gave them a score from 0 to 100. The average score was 54. Now here’s a shocker:

Between 93% and 96% of respondents with well-being scores of 40 or below have difficulty making ends meet, as compared to 2% to 7% of respondents with well-being scores of 61 or above. In other words, being able to pay your bills means you’re more likely to achieve financial well-being that not paying your bills.

With all due respect to the CFPB – No Duh.

If such obvious conclusions were all the survey offered, taxpayer money could have been better spent on updating Donald Trump’s “Make America Great Again” cap collection. The best way to use this survey is as a guide to enhancing financial well-being.

It doesn’t tell you how to make more money. You can, however, learn from other peoples’ triumphs and mistakes and come up with concrete steps that will help you avoid the financial problems that bedevil 43% of Americans. Here’s a good first step:

Build an Emergency Fund

If you haven’t been thrust into a financial panic, just wait. About two-thirds of U.S. households experience a layoff, a pay cut or some other big-ticket event (leaky roof, car breakdown, medical crisis) over a five-year period, according to a Pew survey.

Most are not prepared. A 2016 Bankrate survey found that 63% of Americans don’t have enough savings to cover a $500 car repair. Nearly half of those earn $75,000 or more a year. They should sue themselves for financial malpractice.

Adults with less than $250 in liquid savings (cash, checking or savings accounts) have an average financial well-being score of 41. Adults with $75,000 or more in liquid savings have a score of 68. The 26-point difference is the largest spread of any category examined in the CFPB survey.

Manage your debt

If you carry too much credit card debt or other drags on your finances, debt collectors are going to hassle you, at the least and you’re going to find it hard to get a loan, at the most. Adults who’ve been through those experiences had a well-being score of 43. Those who’ve never been turned down for credit or been contacted by a collection agency had a score of 56.

Again, that’s not exactly shocking news. The real question is what to do about it.

The obvious answer in most houses is either put that credit card away or find a debt relief option to consolidate your bills into one payment at a considerably lower interest rate than credit card companies charge.

It also wouldn’t hurt to call up a nonprofit credit counseling agency and ask for some free advice on setting up a realistic budget to pay down that debt.

Buy a house

Adults who were “very satisfied” with the place they live had a well-being score of 60. That was 10 points higher than those who weren’t satisfied.

The best way to find housing satisfaction is to own the place you want to live. The well-being score of homeowners was 58. It was 49 for renters and 37 for those who neither rent nor own.

Just don’t buy too much house. Respondents who were paying 30% or less of their income on housing had a well-being score of 56.5. That was 10 points higher than people who were spending 50% or more of their income on housing.

Stay in school, preferably one you can afford

The more educated you are, the better your financial well-being will be. Adults with a graduate or professional degree had an average score of 61. Those with less than a high-school degree had a score of 48.

But like housing, don’t overextend yourself when it comes to college. Adults with outstanding student loans had a well-being score of 51, four points fewer than those without student loans.

Retire, get healthy and don’t be a Millennial

Retirees had the highest well-being score (60) of any employment category. It’s pretty easy to figure out why since they had a lifetime to earn and save.

Those who haven’t been around that long (ages 34 or younger) had an average score of 51, which was the lowest score in the employment category.

You can’t control your age, but you can improve your health. Adults who said their general physical health was excellent or very good had an average well-being score of 58. Those who reported their health as good or poor had a score of 50.

Also, get married

Adults who are married or living with a partner had a well-being score of 56. Those who have never been married or who are separated or divorced had a score of 51.

Sadly, the survey did not address all those fathers of brides whose financial well-being has to plummet as they pay caterers $300 a plate to feed guests at wedding receptions.

Improve your financial literacy

Personal financial literacy means understanding financial concepts like interest, debt, compound interest and inflation, and being able to apply that knowledge.

For instance, people with good financial literacy understand how interest on credit card debt can add thousands of dollars to their bill. They also know how compound interest can turn small donations to an IRA account when you are young, can turn into a pot of gold when they retire.

People with high financial knowledge had a well-being score of 58, which was seven points higher than those with lower levels of financial knowledge.

Members of the higher group said they paid bills on time, stayed on a budget, paid credit card balances in full and checked their statements, bills and receipts to make sure there were no errors.

And what’s the one ingredient necessary to pay bills, stay on budget and achieve financial well-being?

M-O-N-E-Y.

“As might be expected,” the survey concludes, “individuals with higher household incomes have, on average, higher levels of financial well-being.”

Yes, Uncle Sam was often Captain Obvious in the CFPB report. It wasn’t exactly a revelation to learn that a higher level of income leads to a higher level of financial well-being. But beneath the obvious there were valuable lessons to be drawn heading into the new year.

Save money. Prepare for an emergency. Have a budget. Learn about finances. Avoid debt.

And eat your vegetables.

If you do that, on a scale of 1-100, 2018 will be off the financial charts.


Sources:

NA. 2017, September. Financial well-being in America. Retrieved from https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_financial-well-being-in-America.pdf

NA. 2016, January. Barriers to Saving and Policy Opportunities. Retrieved from http://www.pewtrusts.org/~/media/assets/2016/01/emergency-savings-report-3_011116_update.pdf

Karen Carlson
kcarlson@incharge.org

Karen Carlson is a personal finance expert and writer. Her financial advice has been published in Time, US News & World Report and Fox Business News. Carlson is an Emmy Award-winning producer of educational television and recent nominee for NFCC Financial Educator of the Year.