What’s Causing Record Household Debt in America? Financial Illiteracy?

Collectively, we as Americans owe a record amount of money—over 13.5 trillion dollars. Yikes!  If you’ve read any of our recent blogs you already know this. But what you might not know is that the recent report by The New York Fed (Mark talked about in last week’s blog) says that while the amount of debt is higher than before the great recession it’s not as risky this time around because things are different. Phew!

Debt in of itself isn’t a bad thing. It can be good when it allows us to buy a house, a car or a college degree we could not otherwise afford.  But it’s important to keep a good handle on our finances to not only understand what’s coming in versus what’s going out and the ability maintain a good balance of both. We also need to be able to understand basic financial concepts like risk diversification, inflation, interest and compounding interest.

Right now our economy is booming with unemployment at a fifty-year low and wages rising. You’d think we’d be having a field day getting our finances in order wouldn’t you? But according to a recent survey by Bankrate that’s not the case at all. We are actually marching in the opposite direction. (That’s why Mark and I keep writing about this topic!)

For example, this year’s report found only 44 percent of households surveyed have more money in emergency savings than the amount they owe in credit card debt. I can shine a brighter light on that 44 percent by telling you it is 14 points lower than last year’s 58 percent and the lowest percentage in Bankrate’s nine year history of conducting this survey. To make matters worse these numbers probably won’t be getting better soon because according to the same report only 43 percent of those surveyed said they were focusing on boosting their emergency savings this year, down from 53 percent last year. Uh Oh!

A couple of months ago I read an article in investmentnews.com called, “Financial Literacy: An Epic Fail in America.” The title pretty much says it all.  The article talks about a 23-year-old graduating senior at a Texas university who was starting his first post-graduation position when he had the rude realization that he had to begin paying back his $90,000 worth of loans and what that really meant in monthly payments—about half of his new monthly salary. This student made it through all those years of schooling plus four additional years of higher learning yet he had no idea what he had gotten himself into.

Sadly this is not an isolated event and many Americans (as well as many people world-wide) struggle with financial literacy. It begs the question: Are students learning enough about how to manage their money?

The Center for Financial Literacy at Champlain College doesn’t think so.  Established in 2010 the center was designed to promote and develop financial literacy skills in k-12 pupils as well as college students, teachers and other adults. In 2017 the center graded each of the states on a National Report Card on Financial Literacy. Sadly only five states received an “A”. 

Wisconsin, where I live, scored an “F” on that report.  That’s probably what prompted then-Governor Scott Walker to sign a bill requiring school districts to incorporate personal finance into k-12 instruction.

With these types of statistics trending like they are, it’s easy to see how many Americans—even in a good economy—are struggling to keep up with their debt. We need to educate ourselves and our youth on financial literacy now! If not, I don’t want to even think about what’s going to happen when our economy takes a tumble.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

Another Record for Household Debt: No Comic Relief Here!

Over the last few weeks my friend and colleague Lisa Brammer and I have been writing about the need to improve our financial literacy. Taken as a whole we consumers are ‘woefully inadequate’ in terms of our understanding of basic financial instruments and ways to manage our personal finances, let alone how our economy works and what drives it. 

Much of our writing has been in relation to Financial Literacy Month, which concluded this past April.  Many financial institutions, as well as Federal and State Governments, used this month to promote greater understanding of critical financial concepts and provide basic tools that are available to the public to help put their financial lives in order.

That is no small task, however, and given the state of household debt it is like turning an aircraft carrier on a dime: it just does not happen quickly.

Yet, as the old saying goes, a long journey starts with a single step.  And sometimes that single step is the hardest to take.  But take it we must or at some point face some pretty dire consequences.

More in a moment on another unique educational tool the Federal Reserve of New York makes available to the public.

But first, to underscore the need for personal financial house cleaning, the New York Fed just released its report on first quarter household debt. 

No surprise: we set yet another record for debt accumulation.  Among the findings from the Fed (read the report here).

  • Total household debt now stands at an unbelievable $13.67 trillion.  All one can say is wow!
  • Debt increased by $124 billion during the quarter.
  • This is the 19th consecutive quarter that household debt has increased.
  • Total household debt increased during this stretch by nearly $1 trillion ($993 billion).
  • Mortgage balances rose by $120 billion while originations declined to the lowest level since the 3rd quarter of 2014.
  • Student loan debt increased by another $29 billion to $1.49 trillion.
  • New auto loans grew to $139 billion.
  • Credit card balances fell slightly to $848 billion.
  • Notes the New York Fed: “As of March 31, 4.6% of outstanding debt was in some stage of delinquency. Of the $623 billion of debt that is delinquent, $417 billion is seriously delinquent (at least 90 days late or “severely derogatory”).”

Clearly, we have our work cut out for us and greater focus needs to be put on financial education before this trend ends in disaster.

In an earlier blog I referenced a site run by the U.S. Government called “MyMoney.Gov” (www.mymoney.gov). Its focus is on basic financial literacy and education, and also provides basic financial management tools to help consumers put their affairs in order. 

To my surprise, however, another tool has been made available by the New York Federal Reserve to educate young people in the hopes that earlier understanding will lead to mature financial decisions in adulthood.

The tool? 

Comic books.

Yes, comic books.  And before you laugh and wonder about another crazy government project there is method to this madness, and comic books have been used by the Federal Reserve for years (since the 1950’s) as aids for teachers and other educators to enhance learning.

According to the New York Fed’s web site: “The New York Fed’s Educational Comic Book Series teaches students about basic economic principles and the Federal Reserve’s role in the financial system.  Created for students at the middle school, high school, and introductory college levels, the series can help stimulate their curiosity and raise their awareness of careers in economics and finance.”

No Batman and Robin here however.  Here we encounter (on the planet “Novus”) “Mr. Murt,” “Flora” and “Q-seven, a blue cube from the planet Alpha-Numerica” among other characters.  Admittedly the comics don’t exactly have dynamic, action packed titles. Here you will find “The Story of Monetary Policy” and “The Story of the Federal Reserve System.”

Yet the intention is very good and the content easy to understand which makes understanding the fundamentals of how our overall economy works a little less wonky and a lot more every day.  If you are an educator, or even someone just trying to understand what the Fed does, or what monetary policy is, check them out at https://www.newyorkfed.org/outreach-and-education/comic-books .

The fact is it will take an abundance of tools and an early start to drastically improve our financial literacy.  However, it is crucial that this start now.  Even if taken in small steps these efforts will help educate consumers on managing their burgeoning debt before the effects become catastrophic.

A. Alliance is here to help.  We supply a key component in the economic chain to ensure our client’s recover their debts and keep their businesses operating smoothly in good times and in bad.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

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Using a Financial Road Map: Tracking your Personal Spending

I was going through the contents of the glove box of our family vehicle the other day.  There—how quaint! —was a road map.  It was very worn, tattered in fact, evidence of the number of family trips we made over the years.  I spent a few minutes unfolding it and then tracing out the highways and side roads we followed.  Lots of miles!  Many good memories.  I then tried to fold it back up again and failing miserably tossed it in the recycle.

I am among those delighted with the advances in personal navigation.  I think maps are great, though, because they show so much detail of the land and geography.  Yes, I know that is nerdy but so I am.

That said I am among the converted when it comes to reliance on GPS.  How did we ever get along without it? 

I recall my first maps app, and of course there was a learning curve. I recall once setting it to follow the shortest route instead of fastest and wound up with a rather extended drive (albeit beautiful) from Gettysburg, Pennsylvania to Pittsburgh.  I recall the beauty of driving through the mountains but we had to wake the kids when we finally arrived at our hotel much later than planned.  So it goes.

Yet the law of unintended consequences does not stop because of the essential usefulness of technology. Have you noticed lately that in addition to distractions from driving while texting there seems to be an increase in distractions caused by driving by GPS?

No less than three times this last week drivers ahead of me have gone from the left turn lane, all the way to the right (or vice versa), across several lanes of traffic, basically ignoring oncoming traffic.  Sometimes I have noticed drivers who stop in the middle of the street looking about confused and then looking back to their GPS or phone.  A friend of mine swears one of their employees drove onto a lake (it was winter and it was frozen) because the dang thing told him to. 

I know the feeling.  “Greta Google” as I call the voice on “Google Maps” is commanding and I admit to feeling that momentary confusion as ‘she’ gives me a command that does not exactly compute.

But I digress.

All this is leading up to a question as to whether or not you track your spending each month or like most Americans you just sort of wing it without a road map?

I don’t have a recommended roadmap for you, but there are all sorts of tools and apps available to help budget and track your expenses.  I know I use one and find it very helpful in keeping track of where our hard-earned money goes.

If you do track your expenses, how do you fare compared to an ‘average’ American family?

The Bureau of Labor Statistics reports this is how an average American’s spending breaks down:

  • Average Household Income (pretax):                     $74,664
  • Average Annual Expenditures:                                 
    • Housing:                                                       $18,186 32.9%
    • Transportation:                                             $ 9,049                  15.8%
    • Food:                                                            $ 7,203                  12.6%
    • Personal insurance and Pensions:            $ 6,831                  11.9%
    • Healthcare:                                                  $ 4,612                  8.1%
    • Entertainment:                                             $ 2,913                  5.1%
    • Cash contributions:                                      $ 2,081                  3.6%
    • Apparel and Service:                                   $ 1,803                  3.1%
    • All other expenditures:                                 $ 3,933                  6.9%

An article posted on CNBC by Kathleen Elkins points out that only 1 in 3 Americans track their spending.  She also points out that we spend 61% of our money on the top three categories: housing, transportation and food. 

Does keeping track of spending help manage our finances better?  According to Elkins, keeping track of, and minimizing, spending, especially in the top three categories, can pay big dividends in the future. She cites one couple who built a $1 million portfolio by age 40 and a 26-year-old who banked $150,000 by age 24.  That is real money!

Now, not all of us can do this in quite the same way but having a financial road map can certainly smooth the road a bit and help keep us off the rocky back roads of life.   

 A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.  

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