Over the past couple of years, there has been a significant decrease in the number of Americans who save money for retirement. The implication of this is that most of these individuals will not be able to sustain themselves after they are released from work. One of the major reasons as to why most Americans do not save is because they did not receive the appropriate financial education to help them manage their funds well. They, therefore, end up making the wrong decisions and living on debts and at the end of the day saving becomes a problem. From these trends, it is evident that the United States needs to do a better job at teaching its people about financial planning, savings, and retirement.
The problem
Number of Americans that do not have enough saved for retirement
Another research conducted by the Federal Reserve Bank of New York (n.d) shows that 65% of Americans have saved little or nothing and as such, they could end up struggling in retirement. The implication of this is that many people are still not saving enough to retire comfortably. The same study still found that 20% of Americans do not save any percentage of their income and those who manage to save it often end up using it for other purposes. Based on this information, one can conclude that more than half of the nation’s population will not be able to meet their standards of living once they stop working. The main reason that most of them give is that they do not have well-paying jobs that will allow them to save for their retirement. It is however evident that lack of jobs, the rise in standards of living or expenses are not the major cause of this phenomenon. What most people do not understand is that lack of financial education or training on how to manage, invest, and save finances has caused these shortfalls. No matter how small a person’s salary is, they will still be able to save for retirement if they were imparted with the knowledge of how to manage their money well.
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Collective debt held in America
The Federal Reserve Bank of New York (n.d.) notes that the total household debt that is summarized by student loans, mortgages, car loans, credit card, and other debts reached a new high of $13 trillion in 2017. In the same year, the revolving credit debt was at an outstanding $1.021 trillion. This shows the extent to which a majority of Americans have shifted their focus from saving to obtaining credit cards. Most Americans often feel like they can manage their debts at the present time but what they fail to acknowledge is the fact that in case of an unexpected emergency, they would not have funds to pay for such an expense. The research also shows that at the peak of their earning years, most individuals have the maximum amounts of debts. Those between the ages of 45 and 54 had the highest debts overall probably because they were encountered with more obligations at the family level including paying for mortgages, college fees, basic provisions, and other expenses. In the current society, people are more comfortable taking loans because they know that they will be able to pay for it in future but at the end of the day, it becomes a liability that deters one from saving for retirement.
Most common savings mistakes that people make
A majority of the employed population normally focuses on savings but they do not really have the knowledge that will assist them to manage their finances as they do so. At the end of the day, they end up making the mistake of focusing on savings alone at the expense of everything else ( O'Donnell, 2009 ). Whenever a person saves too much, they end up ignoring other expenses which normally arise in future to consume a big share of what had been kept aside. For instance, those with high-interest debts need to focus on clearing them before increasing the savings amount because if they fail to do so, then they will end up paying more than what has been saved. The other mistake that Americans make is not prioritizing their savings. After saving, people tend to buy items just because they are on sale. They do not consider the financial implication of making a purchase of say a new car and as such, they end up exhausting their retirement funds on luxurious purchases. Since most Americans were not trained on how to manage their finances, they make they save only to come and use up all their funds on emergency cases or unnecessary expenses such as vacation trips.
Low-income levels
A research conducted by Federal Reserve Bank of New York (n.d.) shows that most Americans do not make enough money to save for retirement and as such, only 28% of the employed population saves to meet their monthly retirement goals. The current wage rate they receive is in most cases not enough to cater to all the demands that arise on a daily bases as well as other emergency occurrences that occur once a person has saved. There is a need for people to understand that a majority of people will fail to save because their salaries are not adequate. These people, therefore, end up saving less because their earnings cannot be used to educate their children, feed their families, meet basic expenses and still be saved for future investment. A majority of the employed population is therefore discouraged from saving because they know that their small contributions will not make such a big difference as far as savings are concerned. The bitter truth is that even after one takes out a student loan to gain the knowledge and skills for specializing in a particular job, the wage rate is still not high and as such, it is not at aligned to the current living standards in the country.
Solutions
Basic savings techniques
One of the main steps that a person can take to manage their finances is to first record their expenses. There is a need for people to know the amount of money that they spend in all categories of their lifestyle so that they can allocate finances to pay for them ( Clark, Strauss & Knox, 2012 ). Next, a budget needs to be made so that the expenses can be organized into a workable list. This step is very crucial because it enables one to know the limit of their expenditure based on their income level. It is here that one would eliminate all the other costs that are unnecessary. One can then consider the amount of money that they will save and classify it as a regular expense so that they can be disciplined in their management skills. Saving needs to be aimed at something and as such, a person should always set a goal for their savings, like retirement so that they can be motivated to achieve this long-term goal.
Living within your means
One of the main mistakes that people often make is living a life that they cannot afford. They know that they earn decent incomes but yet they never really have any money left over at the end of the month. Many individuals do not live within their means and as such, they tend to focus on purchasing flashy cars and living in expensive houses so that they can impress others ( Lim, 2012 ). Others want to fit in the lifestyle of their friends and as such, they end up making a purchase and taking vacations that would plunge them into very big debts without thinking of the repercussions. There is a need for individuals to realize that they need to cut down on such lifestyles by living a life that they can afford. Once Americans realize that they do not have to have the best things in life to be recognized or resected, then they will be one step closer towards achieving their savings goals.
Avoiding unnecessary debt
One of the ways that individuals can be sensitized to save is if they are educated on the things they should avoid when allocating their finances. Many people spend more than they need to because they feel they must purchase something just because it is in fashion. More than 80% of the cars that are driven on the roads have been bought on loan. In other scenarios, parents or couples may decide to take out a loan just to take their families for vacation in exotic locations. These are perfect examples of unnecessary debts that should not be incurred by an individual. A loan should only be taken if it is used to serve a purpose that will be beneficial to an individual ( Reed, 2001 ). People have subscriptions and memberships that they do not use and at times, they make purchases that are unplanned for. Avoiding these debts will be a big step towards achieving the saving goals that a person has set for themselves.
Who should act and how?
Schools should offer more financial classes
Financial literacy is very important in schools because it focuses on teaching students the basics of managing their money through budgeting, investing, managing debts and most importantly saving for retirement. The knowledge that is imparted in the system would lay a foundation for them to build a better and stronger skill set at an early stage thus avoiding the mistakes that many people have made leading to a life of financial struggle and turmoil. In the country, everyone has seen how lack of financial education in school can lead to distress at the retirement age. Millions of Americans have struggled and still continue to struggle every day just to get through a day because they live from one paycheck to the next relying on credit cards to afford basic needs ( Lustig, 2016 ). A majority of the population cannot afford to buy homes, save for their children’s college or invest for retirement because they lacked financial planning. Some have been pulled down by their student loan debts whereas others have simply made bad decisions regarding their finances over the years of their employment. Al these problems can be avoided if financial literacy is taught in schools. The graduation requirements for educational institutions should, therefore, be changed so the curriculum can include financial classes for every student who goes through the system.
Workplaces should offer more retirement seminars
Employers should organize retirement seminars so that their employees can attend them and be enlightened on the need to save for their lives after work. These seminars will provide guidance and knowledge to workers on the need to save and why setting goals is important. In addition to this, they will also benefit from financial management lessons that will help them to eliminate any unnecessary expenses.
Parents should talk to and teach their kids about finances
Parents should teach their children about financial management because this will teach them to be productive members of society. Parents should wait for teachers to do this for them because it is from a young age that this generation will know how to spend, save, invest and manage their money. Parents have an obligation to impart this knowledge into their children so that they can bring a change to the economy through the reduction of debts and an increase in investments. The fact that the country runs on credit should be a wakeup call for parents to help their children to get a good start so that they can have a good financial understanding of why saving is important ( Lustig, 2016 ). They need to be able to prioritize their needs so that they do not purchase what is not important or necessary thus avoiding impulse buying. Teaching on savings can be encouraged in a very easy way by either setting up a piggy bank or savings jar. One can encourage a child to save for something they want so bad, say a toy and as such, they have to fill it up with dollars or coins until the container is full. This instills some discipline in them by showing that if they save money, they can be able to spend it in future for what they want to purchase in the future. At the end of the day, all this will not work if apparent does not lead by example so they should also save so that their children can emulate their financial management skills.
Workplaces should pay their employees a livable wage for skilled/educated labor
In the current society, there only a few employers who have focused on the need to increase the wage rate for their skilled or educated employees. Some companies are normally forced to make these increments because by doing so, they motivate their employees to become more productive. Employers should understand that a skilled person also has personal obligations and as such, they need to maintain a positive work-life balance. This will not be possible if an employee is paid the minimum wage for the input that they provide. Over the past couple of years, the cost of living has gone up yet many employers have not raised the net monthly pay for their skilled workforce. A research conducted by Hinden (2012) shows that 72% of employed individuals feel stressed about money whereas 22% experienced extreme stress over their finances. Increasing the pay of educated and skilled labor force not only alleviates their stress but also gives them a chance to save for their retirement. They can, therefore, secure a brighter future because their salaries can cater to their expenses, investments and savings plans.
Conclusion
In the US, the total household debt has increased over the recent past indicating that most Americans lack proper financial management skills. Based on the information provided above, it is evident that there is a big problem that needs to be addressed as far as finances are concerned. The introduction of learning courses in schools and increasing wages for skilled employees can be used to solve the problem. At the end of the day, it is, however, imperative to note that it is only through education that people will learn how to plan for their money and save for their lives after retirement.
References
Clark, G. L., Strauss, K., & Knox, J. K. (2012). Saving for retirement: Intention, context, and behavior . Oxford: Oxford University Press.
Federal Reserve Bank of New York. Retrieved from
https://www.newyorkfed.org/
Hinden, S. (2012). How to Retire Happy, Fourth Edition . New York: McGraw-Hill Publishing.
Lim, S. (2012). Finances After 55: Transition from Earning a Living to Retirement Living . Vancouver: Self-Counsel Press.
Lustig, Y. (2016). FT Guide to Saving and Investing for Retirement: The definitive handbook to securing your financial future .
O'Donnell, J. (2009). The Shortest Book Ever on Saving for Retirement: How to Make Every Dollar Count in any Financial Climate . Chicago: Moody Publishers.
Reed, T. L. (2001). The 8 biggest mistakes people make with their finances before and after retirement . Chicago: Dearborn Trade Pub.
