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Financial Well-Being in America

According to the report by Federal Reserve, Americans had $1.021 trillion in outstanding credit card debt in June 2017. This represents the largest amount of outstanding revolving credit in US history and beats the previous record of $1.02 trillion in April 2008.

Americans also hit another debt milestone recently. The New York Federal Reserve recently released a new report showing US collective household debt balances totaled $12.73 trillion in March 2017, surpassing the 2008 peak of $12.68 trillion. Older Americans aged 60 and older are also taking on a greater share of debt than previously, holding 22.5% of total household debt in the fourth quarter of 2016, compared with 15.9% in 2008 and 12.6% in 2003.

This high level of debt is potentially worrying, as this could indicate older Americans might not be saving enough for retirement or to address short-term needs. According to AARP Foundation, while 46% of Americans do not have $400 to meet an extraordinary expense without borrowing the money, 25% of older Americans do not have money in savings to meet a $240 unexpected expense. It suffices to say that more needs to be done to help Americans navigate financial challenges and opportunities and to improve financial health.

Measuring Financial Well-Being

As such, the Consumer Financial Protection Bureau (CFPB) set out to develop a consumer-driven definition of financial well-being as follows:

Financial well-being is a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life.

Source: Financial Well-Being in America

In another word, financial well-being implies having financial security and financial freedom of choice.

Through its first National Financial Well-Being Survey, the CFPB has developed a financial well-being scale, which provides a common metric for apples-to-apples comparison of financial well-being across individuals in the US, and sets the foundation to track progress over time. In the newly released report titled Financial Well- Being of America, CFPB aims to measure/illustrate the financial well-being of individuals and the distribution amongst the US population.

How do we fare

According to the report, the average financial well-being score for US adults is 54 on a scale that falls between zero and 100. In addition:

  • Nearly half of Americans had trouble paying their bills.
  • Over one-third of individuals have difficulty making ends meet; approximately one out of five sometimes have difficulty paying for basic needs like food, housing, and medical care

Furthermore,

  1. There is a wide variation in how people in the US feel about their financial well-being:
    1. ~30% of all adults in the US have financial well-being scores of 50 or below
    2. ~30% score between 51 and 60
    3. ~30% score of 61 or above
  2. Financial well-being scores provide information beyond traditional financial measures; someone with lower income can have higher financial well-being than someone with higher income.
  3. Savings and financial cushions provide the greatest differentiation between people with different levels of financial well-being.
  4. Higher levels of financial know-how, confidence, and day-to-day money management behaviors appear to have strong and positive relationships with financial well-being.
  5. Other factors that may influence financial well-being include income and employment status, education level, safety nets (i.e., ability to cover unexpected events), non-retirement investments, health insurance, and ability to rely on friends/family for emergency financial needs.

What Can Be Done

The results of the survey highlight the importance of having liquid savings and safety nets to cover unexpected expenses. It should come as no surprise that good financial habits and attitudes can contribute to improved financial well-being. As practitioners, we must go beyond the basics and seek to provide actionable insights that will allow individuals to leverage the information to improve their financial health. Think about your customers who are living from paycheck to paycheck, or whose income fluctuates from month to month. What types of financial services might they need to help increase their financial security? Innovative solutions that encourage good savings and money management habits, and improve one’s ability to achieve financial goals are now more important than ever.

Over the last few years, FinTech startups such as Digit and Qapital have helped users save money by leveraging behavioral science to encourage better financial habits. Digit uses algorithms to analyze spending & incoming history and decides how much money the user can afford to save. It can also automatically adjust the savings when income and spending change. With Qapital, the user can create different savings goals, which are then funded with rules triggered by specific actions (such as, save a certain amount when you visit a coffee shop).

Another startup, New York-based Blueprint Income, attempts to improve financial security upon retirement by offering a personal pension product. Users can make small incremental contributions in exchange for fixed income upon retirement, and the company works directly with insurance companies to provide the financial backing.

InsurTech startup SafetyNet takes a slightly different approach by attempting to address the financial cushion: their insurance product covers job loss and disability and offers an immediate infusion of cash within 48 hours of the incident occurrence. This contrasts with the reimbursement processes (and speed) that typically plague the insurance industry. It also removes the constraints other policies might have since those benefits are typically offered through an employer and are lost when the job is lost.

Do Well While Doing Good

In a recent FinTech conference hosted by the Economist in Manhattan, Dave Hanley, Entrepreneur & Founder of Tomorrow, stated: There is no reason why you need to be predatory on the poor in order to be profitable. Indeed, the current state of consumer financial health, though challenging, presents us with a unique opportunity to do well while doing good. With thoughtfulness, we can all embark on a journey together in developing new approaches to empower consumers to lead better financial lives.

Don’t find customers for your products. Find products for your customers.

- Seth Godin

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