Despite record-high aggregate wealth and a strong U.S. economy, Americans expressed a sense of financial discontent in recent surveys. Despite improvements in income, financial assets, net worth and overall financial stability, post-pandemic sentiments revealed increased dissatisfaction, as per an October Federal Reserve report.
Notably, regardless of the overall improvement in financial indicators, recent polls reflect a growing pessimism about personal finances. Recent surveys have revealed disparities among broad measures of household financial health. The Federal Reserve’s triennial survey, conducted before and during the initial stages of the pandemic, surprisingly indicates improved finances on average, contradicting these feelings.
Between 2019 and 2022, the median household income increased from $68,454 to $70,259 in inflation-adjusted 2022 dollars, demonstrating enhanced purchasing power despite rising living costs. The data reveal the positive impact of the robust pandemic-era job market, with wages outpacing inflation due to increased worker value amid COVID-induced retirements. The survey also indicates income growth for all earners, with high-income individuals benefiting the most.
So, why do Americans feel they’re always losing money? Are they actually broke?
The Numbers
Despite favorable financial indicators, polls reveal a contrasting sentiment, with 50% of surveyed U.S. adults in January 2023 feeling financially worse off than a year ago, reflecting a shift from January 2019 when 50% felt better off. This disparity emphasizes the disconnect between objective financial improvements and individuals’ perceptions.
Household net worth soared by $51,755 to $192,900, surpassing previous highs. The median average indicates this, with half of households having less and half more than this figure.
The mean average, heavily influenced by the ultra-wealthy, surpassed $1 million in 2022 for the first time, rising 23% from 2019. The median average provides a more representative snapshot of a typical household’s net worth.
The surge in net worth was fueled by a remarkable rise in home prices during the pandemic. Low mortgage rates and the rise of remote work led to intense demand and record-high home prices, increasing median household wealth by nearly $63,000.
Financial vulnerability indicators, such as debt-to-income and payment-to-income ratios, reached record lows, with fewer bankruptcies, late payments and payday loans reported than in any year since 2010.
Despite these positive financial indicators, retail sales consistently surpassed forecasts, suggesting ample disposable income for spending.
The 2022 Survey of Consumer Finances (SCF), conducted by the National Opinion Research Center, is recognized as the “gold standard” for assessing wealth distribution and household financial health. Despite positive hard data, multiple polls indicate that people consistently feel worse about their financial situation post-pandemic.
In a November 2022 ABC News/Washington Post poll, 43% felt worse off, contrasting with 18% feeling better. In 2018, 36% felt better and 14% felt worse.
The Impact of Inflation
Of course, even though some people think inflation is not a major factor in why Americans feel they don’t have money, it’s actually the biggest factor.
Americans face increasing financial stress due to inflation, economic instability and limited savings. A CNBC Your Money Financial Confidence Survey, in collaboration with Momentive, found that 70% are stressed about personal finances, with 52% experiencing heightened stress since the pandemic’s onset in March 2020. Challenges include budgeting reluctance, uncertainty about high-return investments, and late-stage retirement saving concerns.
Concerns mounted among individuals that their savings might not endure, leading to fears of increased reliance on credit cards and other debt sources for sustenance, explained Bruce McClary, senior vice president at the National Foundation for Credit Counseling.
Here are other reasons connected to higher prices and rates that have caused many Americans to live paycheck to paycheck.
Increased expenses
Basic household expenses, encompassing rent, groceries and utilities, increased over the past year, eroding consumers’ purchasing power. A survey of 4,336 adults in March revealed that almost 60% attributed their financial stress to inflation, followed by economic instability (43%), rising interest rates (36%) and insufficient savings (35%).
Weak bank confidence
Silicon Valley Bank and Signature Bank’s (OTCMKTS:SBNY) recent struggles, along with broader concerns about the U.S. financial system, increase uncertainty. Only 10% of adults express strong confidence in America’s banking system, with about a third significantly more concerned due to the recent banking crisis.
High cost of debt
A CNBC survey indicates that 58% of Americans lived paycheck to paycheck, resorting to credit cards for financial gaps. Nearly half attributed their financial stress to credit card debt. Government data reveals rising credit card balances and increased delinquency rates, with household debt jumping by $38 billion in February year-over-year.
Crumbling financial security
Rising costs for essentials, elevated interest rates on various debts and insufficient financial reserves are eroding individuals’ financial confidence. A mere 52% of American adults possess an emergency fund. Among those, approximately 40% have savings totaling less than $10,000, as per the survey.
But It’s Not All About Inflation
Despite surging inflation affecting budgets, Dave Ramsey emphasizes that not all financial challenges stem from high costs. On “The Ramsey Show,” he attributed record-high household debt to consumer responses rather than inflation-driven essential goods price hikes.
Ramsey clarified that debt isn’t a result of inflation but rather a consequence of not adjusting lifestyles to counter it. The Federal Reserve Bank of New York reported total household debt at $17.29 trillion in Q3, with credit card balances totaling $1.08 trillion.
To secure retirement savings, Ramsey suggested a $100 monthly investment in a growth fund from age 25 to 65. However, he emphasized avoiding unnecessary expenses like high car payments and long-term student loans. Ramsey criticized the normalization of debt, highlighting its hindrance to saving for retirement. Instead of curbing spending during inflation, people resort to borrowing, perpetuating their lifestyle.
Ramsey, recognizing the enduring reliance on consumer debt, reiterated his financial advice. He advocates starting with a $1,000 emergency fund as a foundational step, emphasizing its role in handling unexpected expenses without derailing debt repayment progress.
What Should Americans Start Doing?
While most individuals lack large sums to pay off mortgages at once, Ramsey suggests the snowball method for quick debt reduction. List debts, prioritize from smallest to largest and focus on the smallest while making minimum payments on others. Repeat until you’re debt-free.
Once you’ve paid all your debts, the journey continues. Focus on building an emergency fund equivalent to three to six months of expenses. Review recent spending, redirect former debt payments to savings and cultivate a habit of financial prudence.
Upon completing your emergency fund, shield yourself from life’s unexpected blows, such as job loss or extended hospitalization. If fortune smiles, consider your emergency fund as future income, providing a reassuring buffer. Ramsey advises introspection to avoid unnecessary spending and emphasizes personal accountability.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
