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Karen Telleen-Lawton: The Dismal Reality of American Personal Finance

Get this: A 2014 Federal Reserve Board survey found that 47 percent of Americans either would not be able to cover a $400 emergency at all or could cover it only by borrowing or selling something.

That’s scary, especially because a majority need such an emergency fund in any given year. A Pew poll found 60 percent suffered some sort of “economic shock” in the past 12 months: a drop in income, hospital visit, loss of spouse or major repair.

I used to think this first essential savings requirement was a no-brainer. It seems, au contraire, that the no-brainer was me. No wonder an American Psychological Association survey in 2014 found money is our country’s primary stressor.

How did this happen? The simplest answer is that nearly half of households are violating the most basic financial rule: spend less than you make.

Economists used to theorize that people smooth their consumption over their lifetimes, offsetting bad years with good ones by borrowing and saving. Recent research, however, has shown that when people get “extra” money like a bonus, tax refund or small inheritance, they are more likely to spend than save it.

Are adults nowadays naïve, optimists or spendthrifts? A more nuanced look at recent history, documented by Neal Gabler in The Atlantic’s May 2016 issue, gives additional insight at two changes that dramatically affected savings rates.

In 1978 the Supreme Court ruled that state usury laws did not apply to nationally chartered banks doing business in those states. Usury laws limit credit card interest rates (among other things), so this rule allowed national banks to target vulnerable consumers with astronomical rates.

A generation of “mild and rare recessions” followed, so that the high risk of carrying debt was masked by relatively good times.

With these factors (and perhaps others) as background, the personal savings rates plunged from 13.3 percent in 1971 to 2.6 percent in 2005. It has since begun recovering somewhat, to 5.1 percent in 2015.

Median net worth likewise cratered in the 1980s through the early 2000s: over 85 percent for those with incomes in the lowest quintile, and down over a quarter even for the middle earners.

By 2013, the bottom two income quintiles had virtually no net worth at all, according to Gabler. The middle quintile had enough savings to continue paying regular expenses for an measly six days.

Even the highest earners, the top two-fifths, could continue paying their expenses for only 5.3 months if they lost their income. Edward Wolff, an NYU economist, declared the typical family to be in “desperate straits.”

Perhaps our indomitable American spirit helps perpetuate this disconnect between income and consumption. We assume we’ll overcome adversity and that hard work will inevitably get us ahead. But no solution appears around the corner.

Real hourly wages peaked in 1972 and have been essentially flat since then, except for higher benefits. Inflation-adjusted income for the third, fourth and bottom income quintiles has risen less than 25 percent over a nearly fifty-year period! The top two quintile incomes have risen dramatically in that period.

It’s obvious that we can’t go on like this. Policy prescriptions would and will be all over the map, but the most important ones will be household policy changes.

We need to redefine success in ways other than consumption. Anyone for conversation or a game of cards?

— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.

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