Economic News

Hitting bottom hasn't sufficiently changed consumer habits

by Broderick Perkins

(04/23/2010) A second Great Depression may be necessary to get Americans to seriously tow the line on personal finances.

More consumers are changing poor personal finance behaviors as the nation emerges from the greatest recession since the Big D, but many admit they still have their work cut out for them.

A recent survey found that 43 percent of adults now keep close track of their spending, up from 39 percent in 2007.

And the proportion of adults with non-retirement savings has increased from 63 percent in 2007 to 67 percent in 2010.

But when the same survey allowed consumers to grade themselves on their knowledge of personal finance, 34 percent, or more than 77 million people, gave themselves a barely passing or failing grade of C, D or F, "suggesting that many adults would be well-served by a self-imposed 'time-out' during which they could improve their grasp of financial literacy," according to the National Foundation for Credit Counseling's (NFCC) 2010 Consumer Financial Literacy Survey.

The Harris Interactive survey-by-telephone queried more than 2,000 adults about personal finances between March 4 and March 8, 2010.

"Sometimes it takes hitting bottom to facilitate change, and this is apparently what has happened with many American consumers. Tracking spending and creating non-retirement savings are two of the building blocks to financial stability, and the recession has served as a harsh reminder of this to millions who have been affected by the economic downturn," said Susan C. Keating, president and CEO of the NFCC.

Unfortunately, too many consumers still haven't taken to heart the lessons of the real Great Depression -- you can never be too financially prepared.

NFCC also found that a majority of adults, 56 percent, still do not have a budget, and more than 11 million adults (5 percent) do not monitor their overall spending and don't know how much they spend on food, housing, and entertainment.

Experts advise, in order to cut spending and save, you need to know where your money goes so you know where you can cut.

The survey also found more 30 percent of adults -- more than 68 million people -- say they have zero savings and only 24 percent are now saving more than they did a year ago because of the current economic climate.

Personal finance experts recommend a level of savings equal to three to six months of income as the first line of defense against unexpected or emergency financial events, say unemployment, health care urgencies, divorce or other events.

Baby boomers, who thrived during economic boom times, apparently have forgotten what their parent suffered and did not pass on the waste-not-want-not legacy.

Gen Y or Net Generation adults, those born after the mid 1970s, more than any other group, report zero savings. Among those with no savings, 25 percent say in an emergency they would resort to expensive plastic or other credit to bail them out.

"We are encouraged by the positive developments, but nonetheless remain concerned about the many areas where the survey exposed continued financial deficiencies. We still have a long way to go before Americans consider themselves financially literate," Keating said.

Among NFCC's findings:

• Twenty eight percent, or nearly 64 million adults, admit to not paying all of their bills on time. Late bill paying can cost you in the form of late fees and credit report dings.

• Most adults (67 percent) say they pay for most purchases with cash or a debit card, about two in five (41 percent) report that their household carries credit card debt and more than 11 million people (5 percent of adults) say they carry $10,000 or more in credit card debt from month to month. To much credit debt lowers your credit score and the often high interest paid subtracts money available for savings.

• Nearly two-thirds of adults (65 percent), or nearly 148 million people, have not ordered a free copy of their credit report in the past year. And nearly one-third (31 percent) do not know their credit score. Credit bureaus are notorious for incorrect or outdated data consumers are unaware of unless they keep tabs on their credit report.

• About 100 million people, 44 percent of adults, currently have a home budget. Among them, one in three say that the terms of their mortgage somehow turned out to be different than they expected, perhaps because they didn't take the time to read the small print or get help understanding their mortgage.

• The vast majority, 80 percent of adults, feel there are situations where it is acceptable to default on a mortgage often because, they believe, the lender is at fault. However misleading or even corrupt the lender may have been, defaulting on a mortgage comes with serious consequences to a consumer's future ability to buy or rent a home or obtain credit. There are often other more viable options to defaulting on a mortgage.

"The data is compelling and speaks to the need to take action. Many U.S. adults continue to engage in risky financial behaviors and certain subgroups of the population -- young adults and minorities in particular -- are at greater risk than others. Now is the time to invest in America's future with a national commitment to financial education," continued Keating.

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