Let me ask you a question: Are you living on the financial edge?
Take this simple quiz:
You are suddenly faced with an unexpected bill of $500-$1,000 dollars (your water heater conked out; your car needs a radiator; you child had to go to the ER, etc.). How would you cover it?
a) Pay it out of your emergency savings
b) Put it on your credit card
c) Borrow from family or friends
d) Cut back on other expenses and pay it off gradually
e) No idea
Here is how 1,000 Americans polled by Bankrate.com answered this question: (1)
As you would expect, most of those saying they would tap savings to cover the bill also reported having higher income. Frankly, though, I’m surprised that nearly two-out-of-five would use savings to pay off their bill. Based upon the Financial Security Index -- another demographically-representative survey regularly conducted on behalf of Bankrate.com -- only 29% of Americans have any money set aside in the case of an emergency. So one has to wonder whether the additional 8% either based their answer on wishful thinking or would perhaps tap a savings account ear-marked for another use?
Another surprise to me was that just 15% said they would put the bill on their credit card. I would have predicted a higher amount.
The next-favorite option -- reducing the amount of money spent on other things -- is where these results get interesting. This is where you find out what people really value. Respondents were given a list of potential items to cut back on. What would you say?
a) Eating out
b) Buying coffee in a coffee or donut shop
c) Cable TV
e) Your cellphone plan
Coming in dead last, as in “Don’t even think of asking me to change this,” is cellphone usage. Sheyna Steiner, senior investing analyst at Bankrate.com, says “This was the biggest surprise. 80% were not willing to cut back their cell phone plan.” There was no disagreement among the sexes here -- the percentage for men and women was exactly the same.
“A cell phone plan seems to be a necessity, like a home,” says Stein. In fact, 10% of those surveyed said they do not have a land-line phone. Thus, their cell phone is their only means of staying in touch with loved ones and friends. “It’s a major way of being connected,” adds Stein. “They may not have a computer at home. It could be their main way of connecting to the internet, texting, apps and browsing.”
Only one-in-four said they would be willing to reduce their spending on alcohol or cable TV. This is true for both women and men.
Both sexes -- but especially women -- are open to cutting back on coffee purchased outside the home.
Overall, though, “the easiest fat to cut is restaurant meals”, says Steiner. Thirty-one percent say this is the expense they would likely reduce. While this is an entertaining exercise, the real question is why are Americans such poor savers? Our lack of thrift is an international joke.
Steiner maintains that it comes down to the fact that “it’s difficult to establish a saving habit. Some people are better at saving than others. It’s simply a behavioral issue for a large number of people.”
She points out, while employer-sponsored retirement plans and auto-enrollment are helping more people save for retirement, you are on your own when it comes to saving for non-retirement needs. “It’s harder to do when you have to set it up yourself. You have to be an adult and set up direct deposit and find the extra money to put into [a savings] account.”
Is it just our lack of will-power? Having an account that you can tap in the case of an emergency is an essential part of the most basic financial plan. Financial Planning 101 requires that you set aside 6 months’ worth of living expenses before you invest a dime in a mutual fund or elsewhere. Most adults would admit, “I know I should have an emergency fund, but…”
So what’s stopping us? Behaviorial finance suggests we have a tendency to live it up today because tomorrow seems far away and uncertain. But that’s just part of the reason. Perhaps interest rates have been so low for so long we no longer think of putting money into a savings account? Maybe it’s too darn hard to save because so many people are just scraping by. Or, have we become accustomed to the government bailing us out if things get really tough?
Speaking of government, for the worst example of thrift look no further than Washington, D.C. As of January 4th, the national debt stood at $18.9 trillion -- up 78% since President Obama took office. (2) What kind of an example does that set?
1. The numbers do not total 100% due to rounding and the fact that some participants refused to specify or declined to respond to this question.