The Other Half

Jonathan Clements

THIS WEBSITE IS devoted to personal finance—and I try to keep it that way, avoiding partisan political pontificating. Still, as we’ve learned from the 2016 presidential election and its aftermath, the U.S. is a country divided between those prospering in today’s economy and those who feel shortchanged.

In reality, of course, it’s more of a spectrum than a sharp divide: Most folks neither live below the poverty level nor count themselves among the one-percenters. Nonetheless, there are plenty of signs that many American families are having a rough time financially.

Federal Reserve study found that 44% of Americans either couldn’t cover a $400 financial emergency or, to do so, would need to borrow or sell something. Among households headed by someone age 55 and older, 29% have neither retirement account savings nor a defined benefit pension plan, according to a 2015 Government Accountability Office study.

But perhaps the most revealing indicator is this: 50% of Americans are at risk of failing to maintain their standard of living once they retire, according to Boston College’s Center for Retirement Research. This assumes that, once retired, Americans will generate income by taking out reverse mortgages and purchasing income annuities—something few do. In other words, the portion of the population at risk of a belt-tightening retirement is likely much higher than 50%.

What’s it like to be among the have-nots? Like many others, I had some sense when I was in my 20s and starting out in the work world. I had credit card debt from college that I struggled to erase. On the day before I got paid, I was often left with just a few dollars in my bank account. On the day I was paid, I’d stick the rent check in the mail—and hope it arrived before the landlord noticed I was late.

But I was brought up to expect lean times in my 20s and I assumed things would get better, which they did. For the past three decades, I’ve had the pleasure of a gradually rising standard of living. The 50%-plus identified by Boston College’s Center for Retirement Research aren’t so fortunate: They’re facing the grim prospect of spending their final decades living less well than during their working years.

I’m not saying you need lots of money to be happy or that more money guarantees happiness. But if used thoughtfully, I believe money can potentially buy happiness, not least by eliminating that gnawing sense of anxiety that comes with living paycheck to paycheck—or Social Security check to Social Security check.

I’ve written occasionally about how diligent savers, upon retirement, often struggle to turn themselves into happy spenders. That’s a topic that resonates with regular visitors to this site. But it’s a notion that would be baffling to many, and perhaps most, Americans.

Indeed, HumbleDollar’s audience tends to be more affluent and more financially self-disciplined than the broad population. A recent survey of the site’s readership found that 74% of you have annual incomes of $100,000 and above.  You won’t find much written here about digging yourself out of debt, repairing your credit score or which bills it’s okay to pay late. But those are topics that many Americans worry about and which get discussed extensively on other sites.

It’s tempting to declare that everybody, no matter what they earn, should be able to save for the future—and, indeed, I’ve caught myself saying that a few times. And while it’s true, it’s also important to have empathy. To save for the future, we need both self-discipline and extra cash, and many folks fall short on both counts.

What can those of us, who are in better financial shape, do to help? You could donate to one of the charities focused on financial literacy, like Operation HOPE and Moneythink. But how about getting involved yourself? My modest suggestion: Make it a point to talk to others about money. Try to understand the financial reality they face—and mention strategies that could help them to do better. You might start with your children, nieces, nephews and other family members. But also engage folks you meet in everyday life. What strategies should you suggest? Here are five super-simple strategies that everybody could benefit from:

1. Pause before buying. When we make impulsive financial decisions—especially spending decisions, but also when investing—we often end up regretting it. Tempted to buy something you can’t really afford? Try walking out of the store for 10 minutes and you’ll likely make the decision with a far clearer head.

2. Keep your fixed living costs low. If your rent or mortgage, car payments and other fixed monthly costs are devouring a large chunk of your income, your financial life will always be a struggle, no matter how determined you are to save money, keep up with the bills and pay down debt. My rule of thumb: Fixed living costs should be no more than 50% of pretax income.

3. Pay more than the minimum. If you have a credit card balance or other high-cost debt, always pay more than the required minimum payment. Each month, if you send off a check for more than the interest you’re incurring and the new purchases you’ve made, the balance will start to shrink and—fingers crossed—you’ll be inspired by the early signs of progress to work even harder to rid yourself of debt.

4. Open a high-yield savings account. Thereafter, automatically add $25 or $50 every month. As your financial cushion grows, your sense of anxiety should wane, because you know you have the cash to deal with unexpected expenses.

5. Invest in a target-date fund. While a savings account will help you take care of today, a target-date fund will give you hope for tomorrow. If your employer offers a 401(k) plan, you’ll likely find a target-date fund on the menu of investment options. That target-date fund will give you a globally diversified portfolio in a single mutual fund.

If you don’t have a 401(k), consider buying a target-date index fund directly from Fidelity Investments or Charles Schwab. In both cases, there’s no required minimum investment. Again, arrange to add automatically to the account every month. You might even purchase your target-date fund in a Roth IRA, assuming you qualify. That’ll give you tax-free growth. An added bonus: If you find yourself in a financial pinch, you can always withdraw your contributions at any time—with no taxes or penalties owed.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include A Good LifeJack of Hearts, Budget Busting and All Better.

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