The squeeze you feel at the pump is more than just your fingers against the handle — it’s a squeeze on your pocketbook. The cost of gasoline and daily goods are among the top concerns of Americans, even more than declines in the stock market and real estate values. Families are pressed by the rising cost of living, and many wonder how they can plan for a secure financial future when they’re having trouble making ends meet, day to day.
The good news is that specific financial behaviors can provide emotional security in times of economic turmoil. Research commissioned by First Command Financial Services, Inc., and conducted across two years with thousands of American families provides evidence that a financial plan, and the responsible financial behaviors that follow, not only provide the foundation for financial well-being, but also provide inspiration for families squeezed by the rising cost of living. Guided by a plan, families feel more secure and in control of their future, and enjoy greater feelings of confidence in their ability to pursue their retirement goals with a disciplined approach to savings and debt.
HOW SECURE DO AMERICANS FEEL FINANCIALLY?
The research shows that Americans’ feelings of financial security have significantly declined over the course of the past two years. In 2008, only about one-third (35%) of Americans say they feel “very” or “extremely” financially secure from month to month. And this is among households with incomes of at least $50,000 — indicating that financial security is not solely a concern of low- to middle-income families.
THE CURRENT ECONOMIC CLIMATE AFFECTS LONG-TERM OUTLOOK.
In 2008, only 37 percent of Americans say that saving and investing for the future is a top priority in their lives — down from 52 percent in 2006. And the percentage of people who express excitement about their financial future is down significantly from just two years ago, dropping to less than half of the population (49%) in 2008 from 61 percent in 2006.
The lower priority on long-term savings and investing, and the decline in excitement for the financial future may be driven by the anxiety caused by rising daily living costs. Among those for whom saving is not a top priority, 61 percent say that the cost of gas is a primary concern and 48 percent say that the cost of daily goods is a primary concern. And 32 percent state that personal debt is a primary concern.
CREDIT CARD DEBT SAPS FEELINGS OF FINANCIAL OPTIMISM.
Those who are most concerned about the cost of daily goods are also most uncomfortable with their credit card balances. Feelings of optimism about the future, too, are lowest among those who are the most uncomfortable with their credit card balances.
THE DISCIPLINE OF SAVING PROVIDES AN EMOTIONAL LIFT.
The more money families place in savings from month to month, the greater their feelings of financial optimism. Individuals who rank in the top 25 percent of monthly savings are much more likely to be very optimistic (44%) about their financial future.
It’s important to note that financial optimism isn’t dependent on the total amount of money a family has in savings, but on the practice of regularly putting money into savings. A comparison of families who have the most money in savings to those who are just starting out with lower amounts of savings demonstrates that families get an emotional lift simply from the practice of disciplined saving. In fact, this practice may be even more meaningful to those who have less accumulated in savings.
THE SAVINGS-TO-DEBT RATIO
With the practice of saving comes increased feelings of financial security and optimism about the future. And as the amount of savings increases, a family’s feelings of being financially “stretched” from month to month decreases. The opposite is true for short-term debt. The more credit card and personal debt a family is carrying, the less financially secure they feel, the less optimistic they are, and the more stretched they feel on a monthly basis.
One of the most important findings from the research is that a family can have some debt and still feel financially secure and optimistic — as long as they’re disciplined in saving and paying down their debt. Also, while many people express the thought that they should start a financial plan after they pay down some or all of their debt, the research shows that families need not wait until debt is paid down to realize greater financial optimism. Families who have debt may still enjoy feelings of financial security and optimism by engaging in behaviors that improve their savings-to-debt ratio.
THE MORE AMERICANS SAVE, THE LESS FINANCIALLY STRETCHED THEY FEEL.
While it may seem contradictory, the more families save, the less stretched they feel. And this “savings effect” is strongest among the lowest income brackets studied (from $50,000-75,000 and $75,000-100,000). So this effect is not merely a function of how much money a family makes — it is a result of how a family manages the money coming in.
As the ratio of savings to debt increases, families feel less financially stretched from month to month. This finding is not dependent on a family having no debt. Two people with the same amount of debt can have very different feelings of being financially stretched depending on the amount of savings each one has.
In fact, American sentiment on how disciplined financial planning affects monthly disposable income may be changing. Only six percent of the population agrees with the notion that a financial plan imposes undue stress on the amount of disposable income on a monthly basis. This figure is down 10 points from 2006 when 16 percent of the population agreed with that concept.
FINANCIAL SECURITY FROM A FINANCIAL PLAN
The positive feelings toward financial planning may come from a growing recognition that those with a financial plan feel more secure than those without a financial plan.
Overall, 35 percent of Americans say they feel very or extremely secure financially. Among those with a financial plan, feelings of financial security jump significantly above the average — to 45 percent of the population. However, that number drops to 31 percent among those without a financial plan. In addition, those with a financial plan say they have significantly more confidence in dealing with financial matters and report much greater confidence in their ability to retire comfortably.
FAMILIES WITH FINANCIAL PLANS HAVE BETTER SAVINGS-TO-DEBT RATIOS, REGARDLESS OF INCOME.
The increased feelings of financial security and confidence in financial matters seem to come from the specific financial behaviors practiced by persons who have a financial plan, as opposed to factors such as family income.
The savings-to-debt ratio correlates strongly with the disciplined behaviors encouraged in a financial plan. These effects are seen at all levels of income, indicating that disciplined financial behaviors have positive effects regardless of income. A high income is not necessary to provide a family with feelings of security and confidence — disciplined engagement in the positive financial behaviors of reducing debt and accumulating short- and long-term savings is sufficient.
CONCLUSION
With recession on the horizon, tax rebates and other government-sponsored actions have been taken to relieve some of the economic pressure on families and revive their feelings of financial security and optimism for the future.
But one need not wait for government intervention nor turn to short-term debt vehicles for financial relief, security and optimism. Research shows definitively that specific disciplined financial behaviors provide an emotional and rational buffer during times of economic downturn.
American families can take solace in their savings and investment approaches and in their efforts to pay down short-term debt, even in times of economic instability. In fact, families who systematically save and drive up their savings-to-debt ratios feel greater confidence in dealing with financial matters, more optimistic about the future and more confident in their ability to retire comfortably.
Individuals with a financial plan are more likely to have positive savings-to-debt ratios. And this is consistent across all incomes — indicating that a family earning $50,000 per year can achieve the same level of financial hope and confidence as a family earning $100,000 or more per year. Americans are growing increasingly comfortable in seeking out professional financial advice, with the percentage of people expressing anxiety over working with a financial planner only half of what it was two years ago, and with many more recognizing the benefits of working with a financial planner.
There is evidence of hope at the brink of this recession, and it comes to families in the form of disciplined financial behavior.