Happy Wednesday everyone! I originally had a different post planned for today but had to change course when I read this article on Yahoo Finance last week. The article was discussing findings from The Financial Capability Study that surveyed 25,000 Americans last year in relation to their personal financial situation and how “smart” they might be financially. Overall, the statistics were not very surprising and really seemed like more of the same numbers that we have been seeing for quite some time. What stuck out to me though was the study moderator’s claim that the Great Recession has changed financial behavior and I have to respectfully disagree with them. So, let’s get into their findings on what they view as changed behavior.
Are We Really Smarter?
Even though Mrs. Frugal Rules would say I am a pessimist, (I consider myself a realist, but that’s besides the point) I do like to hear the good news first. The good news, if you want to call it that is as follows and has occurred over the past four years:
- 8% increase in people paying off their credit cards each month to 49%
- 5% increase in people having a three month emergency fund to 40%
- 4% increase in people having no problems with monthly bills to 40%
- 9% increase in people satisfied with their financial health to 25%
You might take a look at these numbers and think to yourself that things are on the upswing. Well, let’s take a look at the bad news:
- Only 41% spend less than they earn
- 56% do not have a three month emergency fund
- 34% do not pay even the minimum on their credit cards each month
- The average person from the survey scored a whopping 57% (an F in my books) on a 5 question basic financial literacy test
Now I know there is some debate about the need for an emergency fund within the personal finance community and that is not really the point of this post. That is something I have discussed in the past and really what I am seeing here, ultimately, is a spending issue and emergencies, or the lack thereof, is inconsequential until the spending problem is addressed. To see that only 41% spend less than they earn means that nearly two thirds of the people surveyed are spending more than they bring in each month and that is backed up with the F score on the financial literacy test. As an aside, I took the more expanded 12 question test and got 11 of the 12 correct; given that, I assume the 5 question test probably wasn’t that difficult. I know that we have seen some tough times over the last five years and that might be at play here, but I hesitate to say that tough times are ultimately to blame. So, if there are some people that have been unable to make headway, what does it say for the others who’re not in that position? In my opinion, it shows either a comfort level with having debt and/or living paycheck to paycheck, or it shows a lack of knowledge…not increased levels of being smart.
Do Your Surrounding Circumstances Matter?
What I did find interesting, though not terribly surprising, about the survey results was that they pointed to a number of influencing factors. According to the survey, where you live, how much money you make and your education level have a somewhat significant impact on your level of financial literacy and ability to avoid debt. To be fair, I am sure this plays some role for some, but I highly doubt it as a blanket statement. The study found, surprise surprise, that we emulate those we’re around. Meaning those who spend gather around those who spend and those who save/invest gather around those who do the same. I know this plays a role, but at what level does this become an excuse? We all have our excuses that we like to use in various parts of our life, heck, I know that I use them. The problem comes in when we believe those excuses and use those as reasoning to justify our problematic behavior. This is not to disparage those who do not know better, it is meant as a call to take action and take responsibility for our behaviors. We all do not have the benefit of receiving good financial education that results in us being financially literate, but I do know that there is a wealth of resources available to help teach the basics and fundamentals so we can stop making excuses and start being responsible for ourselves. As one who has benefitted from those resources myself in order to turn around my financial life I can’t encourage you enough to seek them out if you have the need.
Ultimately, it’s Simple Math
So, what are we to do with all these numbers? Are we really smarter in regards to personal finances…I think not. While there are improvements, I am still not a buyer in believing that we’re smarter with personal finances. The question becomes then, how can we change that? Ultimately it comes down to simple math…spend less than you earn. It really is as simple as that, even our five year-old understands that. If you only have a certain amount of money coming in each month then you must spend less than that and save or invest the rest. You can budget or not budget, use an envelope budget or not, you can have an emergency fund or not…what matters is how spend your money. Beyond that it comes down avoiding temptation to spend, being frugal when you do spend and making the remainder of your money work for you as opposed to being a slave to it. Amidst all the theories, preferences and ideas it really does boil all down to that – spending less than you earn and save the rest. If my five year-old can understand it, then I am certain the rest of us can too.
What do you think? Are we really smarter when it comes to personal finances, or are we still coming up short?
Photo courtesy of: Anton Fomkin