“You are more likely to hear from your buddy that he is on Viagra than that he has credit-card problems.” - Brad Klontz, financial psychologist
The other day a friend of mine, whom I like to call my personal curator, forwarded me an article that was published by The Atlantic entitled The Secret Shame of Middle-Class Americans. The genesis for the article came from a recent study conducted by the Federal Reserve in which respondents were asked how they would pay for a $400 emergency. Rather surprisingly, a little under half (47% to be exact) of the respondents indicated that they wouldn’t be able to cover a $400 expense out of their savings or checking account balances and would instead be forced to borrow the money or sell something of value in order to cover the expense.
The results of this survey wouldn’t be too surprising if we were talking about a much larger expense in range of several thousand dollars but four hundred dollars!?! In a similar study conducted by three professors from George Washington University, Oxford, and Princeton individuals were asked whether they could come up with funds within 30 days to pay for an unexpected $2,000 expense. The results were very similar to the Fed study. One of the most surprising data points from this study was that 25% of the respondents making between $100k - $150k a year indicated that they either didn’t have that much available or wouldn’t be able to save the $2,000 during the 30 day window in order to meet the expense. We have become a society with no safety net that is living paycheck to paycheck!
The author of The Atlantic article is a writer by trade and has made a fairly decent living by most people’s standards. He tells his personal story and some of the decisions he made along the way which had a large impact on his financial future. He makes no excuses for his current situation and takes full responsibility for the choices he made, such as putting his kids through private school, which had a dramatic effect on his finances. He identifies the culprit as his financial illiteracy and living in a society where admitting to financial struggle is taboo.
I plead guilty. I am a financial illiterate, or worse—an ignoramus. I don’t offer that as an excuse, just as a fact. I made choices without thinking through the financial implications—in part because I didn’t know about those implications, and in part because I assumed I would always overcome any adversity, should it arrive.
As the opening quote so provocatively stated, no one wants to admit that they are struggling financially, and as a result they fall back on the great American adage that our parents and grandparents have passed down over the years: Do good at school, work hard, and everything will work out in the end. It’s a nice idea, but not always the truth. In 2014, USA Today concluded that in order to achieve the middle-class American dream, to include milestones such as homeownership, a car for each adult, health security, college savings for each child, an annual family vacation, and a secure retirement, a family of four would require an income in excess of $130,000 a year. Considering the fact that the median household income in the US is a little less than half that amount, that goal seems fairly unattainable for most “middle-class” Americans.
The response to this conundrum has been a steady decline in savings combined with a continual increase in debt as people live beyond their means in hoping that everything will work out in the future. We have become a nation of ostriches who burry our heads in the sand in order to ignore our present financial problems without a plan for the future. The caption to a cartoon by Bruce Kaplan which was published in the New Yorker says it best, “We thought it was a rough patch, but it turned out to be our life.” As such, median net worth for an American household has dropped precipitously over the past three decades.
Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop.
Financial illiteracy is in large part the main culprit for our current financial state of affairs. Annamaria Lusardi, who was one of the three professors referenced in the earlier study, conducted another study where she measured people’s knowledge of fundamental financial principles such as compound interest, diversification and the effects of inflation. What she found was that 65% of Americans between the ages of 25 and 65 were financially illiterate. Based on her research, Lusardi concluded that the complexity of a country’s financial system and the financial insecurity of its citizens were highly correlated. In other words, as financial markets have become more sophisticated, our knowledge of finances has not kept place. People end up experiencing a sort of financial paralysis because they are intimidated by their lack of knowledge on the subject.
To be honest, this sort of fear/intimidation makes perfect sense to me. Maybe a parallel for me would be my lack of knowledge about computers. Sure I understand some of the basics and know the age old fix of restarting when something goes wrong, but beyond that, it is a magic box of electronic components running software written in a language that might as well be from another planet. That being said, using a computer is an integral part of my job and everyday life, so rather than stick my head in the sand and refuse to embrace the “magic box,” I’ve made the decision to embrace a technology I don’t fully understand knowing that, if necessary, I can call upon a professional with a much deeper understanding of computers to help me out.
The same should be true when it comes to our finances. Just because something feels scary due to its complexity doesn’t mean it is okay to ignore it. In the case of finances, this ostrich like mentality will have a detrimental impact on future financial security. This is why our industry exists (at least it’s why it should exist). The roll of a trusted advisor is to steward client’s savings and investments while helping them optimize their finances (e.g. taxes, spending, savings, charitable gifts, etc.) in order to set them up for a secure financial future. One of the most rewarding parts of our job is seeing our clients take our advice to heart and make changes in their life that will dramatically impact their financial future. This is why we consider our relationship with our clients to be more than just a “Financial Advisor” and more of a personal Chief Financial Officer (CFO). In the same way a good CFO can unlock value for a business, a personal CFO can help you navigate the complexities of the financial system. In doing so, our goal is provide our clients with the “freedom to pursue what makes their lives truly rich.”
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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