Friday, May 9, 2014

How Common -- And How Dangerous -- Is Living Hand-To-Mouth?



If the news describes someone as living paycheck to paycheck, you might have a pretty good idea of what their life looks like. You might imagine them struggling to get by just to cover all of their bills. You might picture them as constantly juggling those bills and relying on revolving credit card debt. Yet, a new report out of Princeton University suggests that this may not be an accurate vision of this group of people.

            

The report describes the habits of a group it calls the "wealthy hand-to-mouth." 25 million of the 38 million Americans who live hand-to-mouth, that's a staggering 65%, have a median income of $41,000, which is close to the national average of $43,000. This group includes a fair number of people in your community. You might even see a little of your own habits here.

            

These individuals tend to be somewhat older, with a peak age of 40. Their spending habits tend to expand in accord with their income levels. For instance, if they get a raise, they increase their discretionary spending. They might eat more meals out or take on another monthly payment. If they get a windfall, like a tax return or an inheritance, they splurge on a big-ticket item. They pay all their bills on time and don't carry a tremendous debt load. They likely own a home and are building equity by paying down a mortgage. These folks are also more likely to be investing in a retirement account, like a 401k or IRA.

            

Make no mistake: these are important savings strategies. What they don't offer, though, is flexibility. In a volatile labor market, anyone can lose their job at any time. Illnesses and accidents can strike without warning and lead to huge bills. Even inclement weather could result in home or car damage, requiring extensive repairs. If an emergency happens to someone in this group, they may be in for serious trouble.

            

The money in their home and retirement account is inaccessible. They might curtail their spending, but that won't help if they need a large quantity of money in short order. They will have three options: sell their home, cash in retirement accounts, or take on significant debt. None of these options offer much hope of a brighter future. One foul stroke of luck is all it would take to move them from "wealthy hand-to-mouth" to just plain struggling.

            

These kinds of misfortunes happen to everyone sooner or later. That's why the factor most strongly correlated with financial security is regular savings. A "rainy day" fund separates a short-term financial problem from a life-changing tragedy. The "wealthy hand-to-mouth" think retirement funds and home equity will ensure their financial security. The tumultuous early 2000s showed us, though, that making it to that point is no sure thing.

            

Credit union members have a variety of tools that are available to them to help provide this measure of security. Among the most popular is the club account. This is an interest-bearing savings account that allows for unlimited deposits and discourages frequent withdrawals. Another is a Kasasa Saver Account - giving you automatic transfers of your checking account rewards into a high-yield savings.  Consider the money you put into these accounts to be a way of paying yourself. You pay your bills, your house note, and your other obligations on time. Putting money into your savings account is paying off the future trouble you don't want to deal with when it happens. You can set up direct withdrawals from your paycheck or put in a specific amount each month. You and your partner could also put any unexpected windfalls, like bonuses or refunds, into this account.

            

If a disaster strikes, and you need the money, it's there. You won't need to worry about selling your house, cashing in your retirement fund, or taking on expensive debts. A vacation club account is an inexpensive form of self-insurance. If nothing bad happens and you don't use the money before you retire, it'll still be there. You can use it to take your dream vacation, to buy an RV or a vacation house, or just to throw one heck of a retirement party. All the money you've saved will be gaining interest, and it will be a wonderful supplement to your retirement fund.
            
Your parents or grandparents may have kept their rainy day fund in a jar on top of the refrigerator. You don't have to be that low tech. You can protect your financial future, insure against accidents, and gain some peace of mind along the way. Head to Destinations Credit Union and ask about opening a club (Vacation, Holiday or "You Name It") account today!

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