The recession and financial crisis of 2008 never ended for these Americans.
Yes, the economy and stock market are booming and many Americans are enjoying the benefits but others are headed for financial disaster.
That’s the warning of the American Institute of Certified Public Accountants (AICPA).
A Frightening Report
In a report, “Six Personal Finance Trends that Should Worry All Americans,” AICPA notes that despite a strong economy, millions of Americans still have credit and saving problems.
“These people have a false sense of security,” says Russ Zalatimo, an advisor with his own firm in Edison, New Jersey. He reviewed the data and worries that people have forgotten the economic disasters of 2008.
“They think because the sun is shining, it will always shine,” he says. “They don’t understand that they should be ready for bad times.”
Close to Tipping Over into Financial Hell?
Indeed, the AICPA study found that some live on the financial edge, that they are driving on some dangerous roads.
“A record seven million Americans are three months behind on their car payments, even more than during the financial crisis,” the AICPA said. It cited the recent Federal Reserve Household Debt and Credit report.
The central bank numbers show car delinquency payment rates have been gradually rising over several years.
“This is alarming for many Americans because they depend on their cars to make a living and to pay their bills,” says Dr. Sean Stein Smith, a member of the AICPA’s Financial Literacy Commission.
Car loans have been growing over several years, the Fed said.
“Auto loan originations totaled $584 billion in 2018, the highest year in the 19-year history of the data for auto loan organizations and an increase from 2017’s $567 billion,” the Fed said.
Another Bubble Coming?
Smith isn’t sure car loans are creating a bubble that could burst if the economy goes bad, but believes that car debt is one of a number of troubling money developments.
These include many Americans not saving enough for retirement, with less than half confident they’ll have a secure retirement. Some have no emergency cash fund.
If faced with an unexpected expense of $400, “four in 10 adults would either not be able to cover it or would cover it by selling something or borrowing money,” the Fed says.
Borrowing Too Much
Others have taken out student loans that are too big given potential lifetime earnings or have too much card debt.
“The aggregate credit card limit rose for the 24th consecutive quarter, with a 1.5% increase,” the Federal Reserve wrote in its report.
How do you know you’re in trouble?
Smith says you’re in danger “if the majority of your income is going to pay off debts.”
Transactor or Revolver?
Another worrisome sign, advisors say, is the inability to pay off card debts each month. That means the cardholder is often paying 20 percent interest on top of the debt.
GregoryBresiger.com has consistently argued that it should be the goal of every consumer to become a transactor—someone who pays off card balances each month and avoids paying card interest rates.
These interest rates are much higher than other credit vehicles because credit cards are an unsecured asset (unlike other kinds of loans, cards have no asset behind them that can be secured if the loanee can’t pay. Therefore, lenders demand higher rates because they argue they are taking greater risks).
Hated or Loved by Card Companies?
Consumers should try, as much as possible, to be transactors. They are people who pay off card balances each month. They, in effect, require the card issuer to give them zero percent interest short term loans.
This is an arrangement, I can assure you, that the credit card companies detest. They much prefer revolvers for their bottom-line profits.
Some consumers are even in worst shape because they are hardly paying down debts each month.
“If you’re unable to make the minimum payment,” says Neal Stern, another member of the AICPA, “it can result in fees, higher interest rates and a negative impact on your credit score.”
The Road to Financial Sanity
How does one avoid these problems?
“Have six to twelve months of cash on hand in case the economy turns sour as it always eventually does,” notes Zalatimo.
“And pay off your card debts each month,” he adds. “Over the long term you will save a fortune.”
And, of course, have a regular saving and investing program in place. Make it automatic. That means be sure money is taken on schedule every week or month to fund retirement and saving programs.
Think of saving for retirement and other things the way you think of paying your rent or your grocery bills.
Think of it as something you regularly do. And remember: Even though you have less in your pocket, you are working toward financial independence.
You are working toward not being one of the people that the AICPA warns are playing with financial disaster.