Most Americans Unprepared for Loss of Income

America

One of the things that the current government shutdown has done is make even clearer just how unprepared many people are for any sort of economic difficulties.

Although the U.S. government shutdown is now the longest in history, this has only gone on for a little over a month now, and we’re already seeing some serious effects emerge with those who haven’t collected a paycheck in this long.

Advisors recommend that we keep several months’ worth of living expenses in reserve, and 6 months is a popular recommendation. If your household income after taxes is $50,000 for instance, you should therefore have at least $25,000 in savings held in a savings account to manage any economic shocks that may arise, especially ones that involve losing your job.

Telling people to do this and seeing them actually do it can be two different things, and this is certainly the case with advice on savings. Americans are not particularly well known for their penchant to save, although they are world famous for their desire to spend money.

This is to a large degree responsible for America’s keeping the title of the biggest consumer market in the world. Some cultures value saving money more than Americans do, but in the U.S., it is all about consuming and that tends to come first and foremost, with savings being something that you do typically once you’ve quenched your thirst for spending enough.

If spending is really this important, then we may think that ensuring that this continues uninterrupted should events arise that reduce one’s income significantly occur would also be important, but the type of spending fever that we have is not one that gives itself so easily to any forbearance, including the kind required specifically to ensure our spending levels can continue in such situations.

We’re now seeing a lot of federal employees who have been affected by the shutdown already get to such desperate levels as needing to go to food banks to eat, and even missing mortgage payments and putting their home in jeopardy.

This is a Very Widespread Problem

It’s not that these federal workers are in a different boat from average Americans, as when we look at the state of the financial health of the typical American overall, we see that this affliction is pretty widespread indeed, affecting the majority of us to a degree that is quite alarming.

It is no secret that we need to do a lot better job saving money, but to accomplish this successfully, we need to spend less, and there’s just no other way to achieve this. Spending less can be hard for people, and while some just can’t spend much less, most of us could do a much better job of this should we become motivated enough to do so.

This lack of motivation is really at the heart of this problem, where all the messages to consume more has stoked our desires to the point where the need for prudence or even being sensible about managing our personal finances just gets drowned out by this.

Job loss is perhaps the biggest threat here, but not the only one, and anything that sees our income reduced needs to be made up for by having a fund accessible to make up for the shortfalls. We spend a lot of money on insuring things, our home, our car, our life, as well as save for things like our children’s education and our retirement, and while we perhaps could do better at all of this, we do pay attention to these things quite a bit generally.

When it comes to protecting our lifestyle, and in particular, our income stream that is the lifeblood of not just our prosperity but our sustenance, we tend to be far less concerned about such things, and often not concerned at all.

Most Americans Are Not Prepared for Even the Small Stuff

The amount we need is, of course, well in excess of $1000, but 58% of Americans do not even have this little amount saved up for these contingencies. So many of us live paycheck to paycheck, barely scraping by, and it only takes a modest issue such as the temporary suspension of wages by our current partial government shutdown to leave us broke and desperate when we have so little to fall back on.

32% of us don’t even have anything saved up and are just living hand-to-mouth. Often, it’s not that there isn’t enough money coming in, but whatever we take in is directed out, leaving us absolutely nothing left.

There are some people affected by this shutdown that will be fine for a while, but many are in deep trouble already. Just about anyone can experience a loss of income though, and while our jobless rate is the lowest in 50 years, if this rises enough, this is going to put a lot of people in dire straits.

Some of these people are no doubt shaking their fists at politicians, when this should have not been such a big issue at all, and bear most of the blame themselves, even though they may have trouble admitting it. This is how deep the rabbit hole goes, as people often will not even take proper responsibility even after the crisis has hit home, nor learn very much from the hard lessons they have to endure.

It takes a fair bit of time to build up or replenish contingency savings, and while things might be OK now, things are often OK just before your house burns down too. All sorts of bad things can happen without warning, and if we are not prepared, we may pay a big price indeed.

We need to realize that we are playing with fire here when we do not have an effective plan to protect our income against it being reduced due to unplanned events, like this shutdown. The time to worry enough about this isn’t after it happens, as at that point it is simply far too late to matter.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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