American families are facing a confluence of financial challenges, including record-high inflation, escalating costs and mortgage rates that make it nearly impossible for young families to purchase a home. To make matters worse, an abrupt job loss could lead to a financial doom spiral.
Nearly 75% of working adults in the United States are stressed about their personal finances, according to a recent CNBC Your Money survey, with 61% of Americans reporting living paycheck to paycheck. To feel financially secure, around 70% of working Americans say they would need an annual salary of at least $150,000.
Inflation remains the primary source of financial worries impacting American workers today, as 61% say inflation contributes to their anxiety about money.
The high cost of living and inflation eat away at people’s sense of financial security. Despite low-wage earners receiving the most significant pay bumps during the recent U.S. labor shortage, more than 40% of American households still struggle to afford basic necessities, as rising costs outpace their incomes.
According to Bankrate, nearly one in three people have emergency savings, but not enough to cover three months of expenses. To make matters worse, 22% of U.S. adults have zero emergency savings.
Credit Card Debt, Retirement Fund Withdrawals and Student Loans
Credit card debt has topped $1 trillion for the first time on record, according to a recent survey from the Federal Reserve Bank of New York. The latest Quarterly Report on Household Debt and Credit showed an increase in credit card balances by $45 billion to $1.03 trillion, while total household debt reached $17.06 trillion.
The accumulated debt for American households shows an increased reliance on credit cards during the economic downturn.
The national average for credit card debt is $5,733, according to TransUnion. That debt comes at a cost when considering the average APR for revolving credit accounts is 28.10%, according to Forbes Advisor’s weekly credit card rates report.
In need of emergency cash, Americans are increasingly withdrawing from their retirement savings, according to Bank of America’s Q2 2023 Participant Pulse Report.
Many adults in the U.S. are prioritizing short-term expenses over their long-term savings. Data analysis from the survey showed that the number of 401(k) participants taking hardships distribution surged 36% year-over-year, following an uptick in Q1. Additionally, the rate of people borrowing from their workplace plans increased in Q2.
“Regarding the increase in hardships, the economic environment, which has seen higher rates of inflation and cost of living, could certainly be a contributing factor,” said Lisa Margeson, Bank of America’s managing director of external affairs for retirement research and insights.
Draining retirement accounts can lead to families being underprepared for the future, potentially causing them to work longer. High reliance on credit cards can lead to a debt spiral as high-interest rates compound. Falling into a precarious financial situation, it will get harder to be approved for loans. The assumption of additional debt without an accompanying increase in income growth makes it challenging to service large deficits, which can result in a higher risk of defaults.
Student debt is another major financial burden for many families. The average student loan borrower graduates with $37,172 in debt, and monthly payments can be hundreds of dollars, per CNBC. This debt can be difficult to repay, especially for borrowers struggling to make ends meet.
Families who cannot manage their debt and expenses could end up in a financial death spiral—where debt payments and other expenses continue to increase, while income remains the same or even decreases. This can lead to financial ruin, such as foreclosure, bankruptcy and poverty.
How To Avoid A Financial Doom Spiral
The first thing to do is defer gratification. If you don’t have the money, put a moratorium on spending. Build a family budget and stick with it, even if you feel you are missing out and can’t keep up with your peers. Keep close track of your expenditures and income flow. You don’t want to spend more than you make continually.
With high-interest rates on credit cards and strict penalties for prematurely taking money out of retirement accounts, it’s prudent to focus on cutting down on splurging, paying down as much debt as possible and starting to live more frugally. Over time, diligently build an emergency fund of at least three to six months of living expenses to cover unexpected expenses, such as job loss or medical bills.
As Americans are raiding their retirement funds to pay for current expenses, remember that it’s a dangerous practice, as it can leave families with insufficient funds to retire comfortably. Instead, start saving for retirement as early as possible. Even if you can only save a small amount each month, it will add up over time.
If you are having trouble figuring out what to do next, consider seeking help from a trusted financial advisor. The professional can help manage your finances. They will create a budget, develop a debt repayment plan and set reasonable financial goals for you.