5 Personal Finance Statistics You Won't Believe

Industry Focus: Financials edition host Michael Douglass and Fool.com contributor Matt Frankel look at five alarming personal finance statistics that show the state of emergency savings, credit card debt, stock investing, retirement savings, and home-ownership in the U.S.

Here's the scary reality, and what you can do about it if you're in the danger zone in any of these areas.

A full transcript follows the video.

This video was recorded on Oct. 30, 2017.

Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Monday, October 30th. And we thought we'd take a break from investing-centric things and talk a little bit about personal finance. We're pulling out five big money stats that really highlight the state of personal finance in the United States. Now, the aggressive title for this episode is definitely "5Money Stats That Will Knock Your Socks Off." I don't know if we can quite deliver on that, but it's certainly important, as we head toward the end of the year, to really talk about where we are with our money and what we're thinking about for 2018. I'm your host, Michael Douglass, and I'm joined by Matt Frankel. Hey, Matt! Welcome back to the show!

Matt Frankel: Good to be here again!

Douglass: All right, fantastic. Before we get started, I think an important caveat applies here. We're going to talk a little bit about these different stats and what they mean for Americans. But here's the thing. Everything we're talking about here is, in a lot of ways, window dressing for the one fundamental rule of personal finance, which is: spend less than you make, build an emergency fund and invest the rest. Now, I found a great article on fool.com that describes five great ways to save more money. So, if that's something you're really ready to commit to do, either in the back two months of 2017 or in 2018, shoot us an email at [email protected]. It's by one of our best writers, and it has a lot of really thoughtful ways to think about budgeting and saving better, which is something that, frankly, I think all of us can do. Again, shoot us an email at [email protected]. With that out of the way, Matt, let's start by talking about emergency savings. 

Frankel: Sure. The statistic that really jumps out to me here is almost six out of 10 Americans cannot cover a $500 unexpected expense without either borrowing the money, using a credit card or selling something. Experts generally suggest you have about six months of expenses, and that's a big, big difference there.

Douglass: Yeah. It's interesting to me, because when I think about $500 expenses, that's really not that much. We're talking about a really bad trip to the dentist. We're talking, your car's AC blows out. Actually, when mine did, it cost over $2,000. Let's not talk about that, it was a tough summer. [laughs] But, when you think about it, that's not really that much money, and it really highlights how much Americans are living paycheck-to-paycheck.

Frankel: Yeah. A lot of people just aren't very good at saving money. And of those who are, and I'm guilty of this, a lot of them are not very good at putting it in readily accessible places. For example, I tend to max out my retirement accounts to the detriment of putting some money in a place where I could readily get to it. So, this is one area I could definitely improve on. Maybe that's my 2018 New Year's resolution.

Douglass: Well, that sounds like a very good article to write some time in the relatively near future. I think for me, it's frustrating, almost, because when I think about investing, I want every dollar I have to be working for me in some way. I don't want to except that 0.25% in my savings account or something like that. What I really want to do is invest in the stock market and hopefully get a 7-8% returns. But, that safety cushion basically enables you to take more risk in other areas of your finances because you have that solid foundation ready to protect you. 

Frankel: Right. In my case, if I got a flat tire, I would generally put it on a credit card. And if I'm paying 15% interest, that more than offsets the 7-8% returns I'm hoping to get from my investments. We'll get to credit cards in a minute, but this is something that people need to think about when it comes to putting some readily accessible money on the side.

Douglass: Absolutely. That's the perfect segue. Why don't we hop on over to credit card debt. It's really incredible to me how much the average American household's credit card debt is.

Frankel: Right. The average American household has about $5,700 in credit card debt. But that doesn't really tell the whole story, because only about one in three households carry credit card debt. So, among those households that do, the total is a little over $16,000. The average credit card interest rate is about 15% right now. That implies that the average household that carries credit card debt is paying nearly $2,500 a year just in interest for the privilege of owing that money.

Douglass: Yeah. That's a pretty brutal set of statistics there. I think it really highlights this question we all have to ask ourselves of our money. Is our money enriching us, or is it enriching somebody else? When you have credit card debt, your money is enriching someone else. And I think there are some misunderstandings about credits. I've heard this myth pretty often, where people say, "I have to carry a balance on my credit card to benefit my credit score." That's not true. You do not need to do that. In an ideal world, you are never in a spot where you're carrying a balance and having to pay interest on it. You want to pay your credit cards off on time, every time.

Frankel: Yeah. There is some truth, in the sense that you need to use your credit cards in order to maximize your credit score, use your credit. That's the whole definition of having a credit score. But, the concept that you need to carry a balance from month to month, that's a very popular misconception. You don't need a balance in order to maximize your credit score. I think one of our writers, Sean Williams, actually has a perfect credit score and carries no credit card debt whatsoever.

Douglass: Yeah. It's certainly doable without carrying a balance. In fact, carrying a balance does not do anything to help you. The other thing that this highlights to me is, it really stood out to me, when you talk talked about that $2,500 per year that people are paying in interest on their credit cards, think about how much money that is. Think about if that $2,500 were going to an emergency savings. I think there's a lot of need for people to think about how to really pare down that credit card debt. For me, I think a lot of people end up in this spot, where because they didn't have a lot of emergency savings, they then end up owing credit card debt on a car repair, or something like that. So suddenly, they're in this spot where they're trying to fight to keep their heads above the water. One of the things that really jumps out to me is this idea that a lot of folks are stuck paying the minimum balance on their credit cards, that minimum payment. The thing is, if you commit to paying the same amount each month at least, so, your minimum balance will decrease over time, because the amount that you owe decreases over time as you gradually pay it off. But, if you keep to that same amount, you can save a lot on interest by just paying that, let's just say, for example, $360 every month, instead of, as it drops down to $350 or $340, paying that minimum. That'll enable you to pay off that debt significantly faster, while still maintaining the same budget that you had.

Frankel: Another good point, right now, competition among credit card companies has really never been higher, and there are a lot of great, I mean, the best I've ever seen, 0%, balance transfer offers, some companies are even willing to waive the balance transfer fee, which is historically unprecedented, almost. You can find 0% interest up to 21 months, as of right now, 15 months with no fee whatsoever. So, this could be a good way to make sure all of the money you're paying is going toward paying down your debt, rather than making the credit card companies money.

Douglass: Yes. 0% balance transfers are an incredibly attractive option if you have a pretty good credit score and are sitting on some credit card debt. Just like you said, Matt, it's a great way to make sure that you are paying off that debt as quickly as possible with as little money as possible so that you're not enriching that credit card company. The important thing is to commit to doing that. So, if you do that 0% balance transfer, don't just sit and wait for 21 months and spend money elsewhere. You really want to make sure that you are paying it off quickly. Let's talk about stock investing a little bit.

Frankel: Sure. It might surprise people to learn that just over half of U.S. adults own stock, 52%. This may not sound too surprising at first, when you think about how many people you know that actually buy individual stocks, but this includes things like 401(k)s, owning a stock through a mutual fund, college savings plans, things like that. Almost half of all Americans don't even own stocks indirectly. And this is sharply down from before the Great Recession hit about eight or nine years ago.

Douglass: Yeah. The two things that really jump out to me from that, first off, there's this fear of investing in individual companies, because it's hard to pick winners and losers. It's a lot of effort. Let's face it, Matt, how long in a month do you spend thinking about individual investments?

Frankel: For my own, I would say, three or four hours a week, easily.

Douglass: I'm right around 15 or so hours a month myself. That's lot of time. That's time that you could spend doing, frankly, other things. And if you're not willing to put in that time, then individual stock investing or beating the market through individual stock investing is going to be incredibly difficult. But the thing is, we have these things, index funds and exchange-traded funds or ETFs, that essentially give you that guaranteed exposure to the stock market for usually pretty minimal fees. And that's really a great way to get an automatic diversification if you're not going to spend the amount of time necessary to really figure out one stock over another.

Frankel: Yeah. People need to approach stock investing from a long-term perspective. Sure, in any given year, it's completely possible, not even considered unusual, for the market to go down 20-30% in a year. It's happened 10 times in the past 50 years. But, if you think about it from a long-term perspective, over any long period of time, the stock market has returned between 8-10%, depending on the time period you're looking at, very consistently. So, people who are investing for the long-term, especially for retirement like in a 401(k), really need to think of it from that perspective.

Douglass: Agreed. The other thing that I think a lot of people fear is risk, and the possibility of losing their hard-earned money. And I get that. If you're listening to this podcast, you are probably not one of those people, because we are an investing podcast. But the fact of the matter is, people often fear this idea of having their hard-earned money and watching it disappear. But the fact is, as you pointed out, Matt, long-term, the stock market is a much better compounder of wealth than most other forms of saving. It's certainly better than cash.

Frankel: Definitely. As somebody who owned stocks before the financial crisis, I had a few bank stocks in my portfolio, too, so I completely get that it can be scary. But, having said that, this implies that some people with 401(k)s are putting their money in cash assets --

Douglass: Or bonds.

Frankel: Or bonds. But, cash assets, ironically, are the ones that lose value over time, despite what people think about it. Inflation erodes your purchasing power. Putting your 401K in cash is arguably the worst thing you can do in the long run.

Douglass: Yes. It's the risk of losing some money in the short-term versus the near certainty of not having enough money over the long-term. Speaking of which, it seems like a good time for us to talk about retirement savings.

Frankel: Yes, definitely. For retirement, the statistic that stands out to me the most is the average retirement savings of Americans, which is $95,776 as of the latest data. In the older group, the pre-retirees, which is 56-61 years old, it's $163,577. Which sounds like a lot at first, but really is not enough. The average social security benefit right now is around $1,400. You might have the actual number in front of you.

Douglass: Yeah, it's right around there.

Frankel: That's about right?

Douglass: Yeah.

Frankel: That's not likely to be enough, when you think about how much money you spend. The average American needs a whole lot more than they have. And this is, when you hear about the retirement crisis in America, what they're referring to.

Douglass: Yeah. To be precise, that's $1,413.08 as of the 12-month period ending June 2017. So, it's really not that much money. When you think about your average expenses on a monthly basis, it's most likely, unless you live in an incredibly low-cost area, you're spending a lot more than $1,400 a month. So, I would encourage everyone listening right now, do a quick exercise. What are your current monthly expenses? Write them down on a piece of paper, or just do a total average guess. Maybe it's $5,000 a month, maybe it's $6,000. Take that, subtract $1,400, because that's more or less the average social security amount. The remainder, multiply it by 25. That's a reasonable guess for how much money you're going to need to have saved for retirement if you're going to maintain your current spending. Maybe you spend less in retirement, maybe you spend more because of healthcare. There's a lot of ways and reasons to argue either for your spending going up or down. But if you just assume the current, that's what that number looks like. It's probably a big number. It's probably pretty daunting. But, fortunately, there are a lot of ways to get there.

Frankel: Yeah. It's actually probably closer to $1 million for the average American than $163,000, which is what people are saving before retirement. Based on the 4% rule for retirement, which is not perfect by any means, but it's a good guideline, based on that rule, $1 million translates into ...

Douglass: $40,000 a year.

Frankel: Yeah. I'm the math guy. [laughs] It translates into about $40,000 a year of sustainable income that won't run out. And that's from $1 million. $163,000 does not translate to nearly what most people consider a living income.

Douglass: Yeah, absolutely. The other thing that I think is worth considering is, there are a lot of ways to save for retirement, and a lot of tax benefits to doing so. When you think about your 401(k), if you're in a traditional 401(k), you get the text back up front. If you're in a Roth 401(k), then that money can grow tax-free and you can take it out tax-free for forever. If you think about IRAs, there are benefits to those as well, both either traditional or Roth. Frankly, when you have a 401(k), usually your employer gives you a little bit of money as a thank you for saving for retirement. It's called the employer match. And that's something that everybody should maximize if they have that opportunity.

Frankel: It's not just for the long-term effect. Like you said, you get a nice tax break now, or later. But for a traditional IRA, for example, if the average person maxes out their traditional IRA, which is $5,500 right now, that's about $1,000 in tax savings for the person in the average tax bracket. And that's on top of the compounding power over the long-term, and ending up with enough money to save for retirement. You actually get a nice little bonus along the way.

Douglass: Yeah, it's a pretty substantial bonus. And it's interesting, because these are bonuses that a lot of people forgo, even when they're saving in other ways. So, really think about the potential tax benefits of a retirement account. If you're interested in learning more about traditional vs. Roth and how does work, I have an article on that. Just shoot me an email, [email protected], I'll be happy to send it to you so that you can understand what the benefits and drawbacks of each are, and then apply those to your personal circumstances and make the decision that makes the most sense for you. With that in mind, let's turn to home ownership. Now, before we get into this, I just want to highlight, we did this a little bit in order. So, when we're thinking about what you need to do -- generally speaking, of course, we can't speak for everyone, but generally speaking, in personal finance, the very first thing you need to do is establish an emergency savings fund. The next thing is to pare down credit card debt. After that, personally, I think stock investing is important. And after that, thinking about retirement savings. Finally, there's an opportunity to really start thinking about home ownership. Now, I'm a little bit biased, because my wife and I are about to close on our first house. Well, hopefully, knock on wood. [laughs]

Frankel: Congratulations.

Douglass: Thank you -- well, talk to in two weeks, we'll see if congratulations are still in order then. But, here's hoping. And we've certainly done the other four things first. I tend to think that's the right order to do things. But, of course, it may be different for different people. Everyone follows different paths to get to where they are today. But, keep that in mind. So, with that all said, let's talk about home ownership a little bit.

Frankel: Sure. I've been through the homeownership process three times myself, and I can tell you it's a good idea to get the other four things we talked about in order first before you jump into home ownership. Having said that, it's worth pointing out, the median net worth of a homeowner is 90X higher than the average renter, about $200,000 versus $2,200, roughly. But I'm going to put a big asterisk after that statistic, because this is kind of a bias group. The average homeowner is older than the average renter. The average homeowner is further into their career than the average renter. And when you talk about that net worth, you already mentioned, Americans are pretty bad at saving. And that's true for homeowners just like it is for renters. But the average homeowner, most of that net worth is in home equity, not in liquid assets like stocks and bonds, 401(k)s.

Douglass: It's interesting, because in a lot of ways, this median net worth -- again, 90X that of a renter -- really highlights the difficulty that a lot of Americans have saving money. Home equity, you can think of it as forced savings. Now, that's an oversimplification on so many levels, because home equity is not liquid, you can't get to it easily, also real estate prices change dramatically. All those caveats aside, it's a form of wealth that accrues automatically with every mortgage payment. And that's something that folks are able to do when they really struggle to do a lot of other saving. I think one thing that we can really learn from that, though, is this idea of, what I would consider invisible savings. One of the benefits of the 401K is that you don't see the money beforehand. Before your paycheck comes to you, some portion of it gets siphoned off and disappears into this account where you don't see it. And that's really crucial, because it's money that you don't think about having, so it's money you can't spent. I mean, you can, but you have to take a lot of effort to spend it. I've actually tried to do this with a lot of my different savings, automating things, setting aside savings for each paycheck, setting aside and IRA contribution in each paycheck, just to basically put the amount of money that I see and can therefore spend mentally, make that amount smaller and smaller, so that anything we do spend, splurge or go out to eat or whatever, we're not compromising on those retirement savings.

Frankel: Right. Like you said, it's not a perfect example of forced savings. We'll ask anybody who bought a home in the early 2000s how much forced savings it was. But, it is a great wealth builder overtime. At some point, if you're paying down mortgage, you're going to own your house outright, the actual amount of home equity you have will go up and down significantly over time. But, in general, it's a really good way to automate the whole process, just like you said, with the 401K. I have a certain amount going to my daughter's college account every paycheck. It's something like that, just, automating is kind of the key to personal finance success in general, in my opinion.

Douglass: Absolutely. Again, talking about personal finance success, we have that article on the five tips for saving more. Just shoot us an email, [email protected]. And do yourself a favor, commit to doing that today.

That's it for this week's Financials show. Questions or comments, you can always reach us at [email protected]. Hey, by the way, while, you're online, shoot us a review either on iTunes or wherever you get your podcasts. It helps us get Industry Focus out in front of more Foolish listeners. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, I'm Michael Douglass. Thanks for listening and Fool on!