Rosalind Evans
A new annual report from the Federal Reserve suggests that the overall financial health of Americans has taken a hit. The recent report, which focuses on the economic stability of U.S. households, was released last week.
The study from 2022 revealed that only 63% of adults could cover an unanticipated expense of $400, a fall from the previous year’s figure of 68%. This aligns with other recent surveys which indicate that the emergency savings of Americans are shrinking amidst record-breaking inflation.
To counter the escalating prices, the Federal Reserve has been steadily increasing interest rates, leading to another challenge for households: elevated debt interest rates.
According to the Federal Reserve Bank of New York, credit card debt in the U.S. has nearly reached $1 trillion, with a precise figure of $986 billion in the first quarter of 2023. Based on the central bank’s research, this is the first instance in two decades that the balances haven’t been reduced after the holiday season.
Bruce McClary from the National Foundation for Credit Counseling pointed out to CNBC in February that an “unpleasant mix is on the horizon” as individuals and families grapple with surging prices, diminishing savings, and increasing debt costs.
These pressures have persisted, experts have observed.
“Many people are dealing with increasing stress levels concerning their finances,” Mark Hamrick, a senior economic analyst at Bankrate, noted.
As long as economic growth remains subpar and inflation high, this scenario will likely persist, predicted Hamrick.
Despite these conditions, experts suggest several strategies consumers can implement to alleviate their financial strain.
‘Don’t Wait for Debt Collectors to Reach Out’
The National Foundation for Credit Counseling has noted two trends: a rising number of people seeking help from nonprofit credit counsellors, and a heightened demand for their debt management programs, according to McClary.
“There has been a reduction in budgetary flexibility for people over the past year,” McClary observed.
He noted that some are seeking help after falling behind on payments and beginning to receive calls from debt collectors.
“My suggestion to people is: Don’t wait until you receive a call from a debt collector,” McClary advised.
“If you foresee a missed payment, seek help,” he recommended, from lenders, a credit counsellor, or a trusted financial advisor.
According to McClary, waiting until a missed payment may limit available options.
‘Consider Postponing Nonessential Purchases’
Hamrick advises consumers to defer unnecessary purchases as prices and interest rates escalate.
“Give serious thought to postponing discretionary purchases or at least ensuring they stay within or below budget,” Hamrick suggested.
Hamrick pointed out that in Bankrate’s history of conducting surveys on primary financial regrets, participants never expressed guilt over not spending more. However, a common regret is failing to save more for long-term goals such as emergency savings or retirement.
By postponing significant expenses, such as a car replacement, households can redirect their budget to cover other costs or save some cash.
Allocate Time to Oversee Household Finances
Hamrick recommended that people reserve time to manage their finances, similar to how they plan their daily, weekly, or monthly activities.
This could be as straightforward as reviewing bank transactions to ensure budgetary compliance. He suggested that it may also involve monitoring subscriptions and other recurring charges to identify potential areas for cost-cutting.
Hamrick noted that individuals might be surprised by the amount they can save each month by cancelling services, renegotiating rates, or switching providers.
According to Hamrick, if there is any surplus cash, the current high-interest rate environment provides a remarkable opportunity for better returns on those funds.
“High-yield savings is an exceptional opportunity at the moment,” Hamrick stated.
In an era of economic challenges, American households grapple with the dual pressures of increasing credit card debt and declining emergency savings. However, financial experts suggest proactive measures, including early engagement with debt collectors, considering the postponement of nonessential purchases, and dedicating time to managing personal finances as possible strategies to alleviate the burden. Amidst the storm, the silver lining is the potential benefits from high-yield savings in the current high-interest-rate environment, turning the tide of financial stress towards greater economic resilience.
