Financial illiteracy is an increasingly large problem in the United States, a fact especially true for minority groups in lower socioeconomic classes. According to a recent survey conducted by Standard & Poor’s, only 57% of U.S. adults are financially literate. This was measured by those exhibiting knowledge across the following four basic financial concepts: risk diversification, numeracy, inflation, and compound interest.
A lack of financial literacy can greatly inhibit the average American’s ability to reach their financial goals. Let’s look at two of the major issues impacting Americans’ financial wellness and some solutions to these problems.
Many Americans Don’t Have an Emergency Fund
A key principle of financial wellness is building and maintaining an emergency fund. An emergency fund is an amount of money you set aside for emergencies. Having an emergency fund can safeguard your financial health by keeping you out of debt in the event of unexpected expenses.
An emergency fund is foundational to any sound financial plan. It provides the buffer that allows you to endure the inevitable and unexpected financial difficulties of life. The size of your emergency fund largely depends on your tolerance for risk and ability to save. That said, most financial professionals advise establishing a minimum reserve of three to six months of monthly expenditures.
Saving that much money can seem daunting for households who are living from paycheck to paycheck. But it’s important to start somewhere, even if you only can only save a few dollars at a time. According to a report by the Financial Industry Regulatory Authority, low-income households with just $100-$250 in savings were more likely to be financially stable and to feel financially satisfied.
When starting an emergency fund, first create a personal budget. This foundational step is important to help you understand the relationship between how much money you earn and spend each month. Once you’ve done that, you can set a realistic goal for your emergency fund and figure out how much you need to save each month to reach that goal.
Many Americans Are Drowning in Credit Card Debt
Credit card debt is a growing problem in our country, with a recent report finding that roughly 14 million Americans have over $10,000 in credit card debt. A 2021 survey of credit card users reported that 15% of respondents have been carrying a monthly credit card balance since before 2006.
Many people accumulate excessive credit card debt because they do not maintain a household budget. As a result, they do not understand their finances, and they lack a mechanism to encourage discipline. This can lead to a carefree attitude toward spending and the liberal use of credit to make ill-advised purchases. Unfortunately, it doesn’t take long for high-interest debt to cripple you financially.
Consumers looking to pay off credit card debt quickly have a few options. If your credit card charges high interest rates, you might be able to transfer your balance to a card with an interest rate that’s lower than you’re paying now or even 0% for the introductory period. Personal loans are another useful strategy, as they also tend to offer much lower interest rates than credit cards. No matter which route you choose, curbing overspending is paramount.
3 Cited Research Articles
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- Consumer Financial Protection Bureau. (2022). An essential guide to building an emergency fund. Retrieved from https://www.consumerfinance.gov/an-essential-guide-to-building-an-emergency-fund/
- FINRA.org. (2020, December 10). Finra.org. Maintaining Over $100 in Savings Linked to Increased Likelihood of Financial Stability in Lower Income Households. Retrieved from https://www.finra.org/media-center/newsreleases/2020/maintaining-over-100-savings-linked-increased-likelihood-financial
- Ramirez, K. (2022, February 17). 14 million Americans have over $10K in credit card debt, survey says: 3 ways to pay it down quickly. Retrieved from https://www.foxbusiness.com/personal-finance/credit-card-debt-in-america